We’re nearly two months into the broader market’s massive rally, and there’s been nary a pullback.
For risk-tolerant contrarian investors, select oil stocks within the drilling and exploration industry are providing just that sort of opportunity.
Let’s examine oil stocks Rowan Companies PLC (RDC), Atwood Oceanics, Inc. (ATW) and Transocean Ltd (RIG) and why, in spite of all the financial deep water the group is dealing with, each might be considered speculative longs to different degrees, in one’s portfolio using limited risk options strategies.
Here are three oil stocks to take a look at:
Drilled Oil Stocks to Explore: Rowan Companies PLC (RDC)
It has been a bad situation for oil stocks like Rowan. Shares of RDC reflect the fallout in oil prices, as the stock has plummeted by nearly 65% to under $15.75 since 2011 and its post-financial-crisis high of $44.83.
But despite the predicament of a punishing operating environment for these oil stocks — where low dayrates, lowly backlogs, scarce new contracts on the horizon and debt burdens are seemingly the norm — RDC should manage to survive.
This particular oil stock just came off an upside profit beat which also boasted an enviable decline of just 4% in year-over-year, same-quarter revenues for RDC shareholders.
Also good news, RDC has just three rigs, and older ones at that, coming off contract in 2016.
What’s more, this oil stock also maintains business with the formidable Saudi Aramco. The ties should allow for future contract renewals, even in a weak operating environment, rather than having multiple rigs laying idle in the future.
Net, this oil stock’s situation makes RDC stock an attractive play within the group.
Click to Enlarge Technically, RDC is also showing signs this oil stock will be a survivor. In fact, in a cyclical bear, Rowan is the strongest of our three drilling and exploration picks.
RDC’s big picture has this oil stock setting up as a double bottom play as the February low of $10.67 essentially matched the February 2009 low of $10.28.
More recently and on the daily view of this oil stock, following a massive spike higher, shares of RDC have back and filled to find support off the 50% retracement level and lower Bollinger Band.
Regarding a bigger picture options strategy and given that shares of RDC stalled at a test its 200-day simple moving average, I like the October $18 / $22 bull call spread.
Currently priced for $1.10, this limited-risk out-of-the-money spread is a smart way to reduce risk and capture outsized profits in RDC on a confirmation move that the bear is dead in this oil stock.
Drilled Oil Stocks to Explore: Atwood Oceanics, Inc. (ATW)
The second of our oil stocks is Atwood Oceanics, and as the provided ATW weekly chart suggests, we’re exploring deeper waters in this oil stock.
Shares of ATW are off a staggering 85% since establishing a relative high of $59.49 back in August 2013 and have cleanly broken below its late 2008 low of $12.60.
Nonetheless — or maybe better yet — as a contrarian play, ATW is an oil stock we believe will also make it through the bear market in oil.
ATW isn’t in as good a position as RDC, but Atwood did recently lift the burden of immediate debt concerns with a change to its loan agreements. That’s good news.
But Atwood isn’t out of the woods entirely. This oil stock’s backlog is weak and in definite need of improvement if it’s going to maintain its new interest coverage covenant of 1.15x beyond 2018.
Click to Enlarge Regarding a strategy, the ATW May $10 call for 40 cents is interesting as a way to position with limited risk so you won’t get caught holding the bag.
Options liquidity isn’t the best in ATW, so a near-term, outright call purchase is, by default, the most realistic position for this oil stock.
Despite these limitations, the pricing of the call does allow for a breakeven below the recent high of $10.76 and permits a trader to ride any potential upside earnings catalyst when ATW reports in early May.
Drilled Oil Stocks to Explore: Transocean Ltd (RIG)
RIG is the last of our oil stocks, and I’ve saved the deepest chart exploration — and riskiest fundamentally — for last.
Technically, the most recent stock action in RIG places this oil stock in, for all intents and purposes, a double-bottom on the daily time frame.
The decline has been much deeper than ATW and RDC’s own backing and filling and could be taken as a sign of weaker prospects for RIG.
What’s more, as the monthly chart shows, RIG has also witnessed a much deeper slide, with shares collapsing about 90% since 2011 and trading well below the 2008 – 2010 double bottom near $42 a share in RIG.
Click to Enlarge The relative weakness in this oil stock appears tied to Transocean’s fleet of rigs; the largest in the industry. The concern from investors is how a prolonged period of low oil prices might negatively impact the company harder than its peers.
For positioning in this riskier oil stock play, the RIG August $12 call for up to 55 cents is favored.
Compared to a price of $8.70 in RIG stock, the out-of-the-money pick might seem counterintuitive given RIG’s steeper price decline. But, that may be just the point in this oil stock.
I’d rather spend less up front than on a closer-to-the-money call in the event RIG’s more aggressive bearish price action and short interest of 40% is correct on this contrarian oil stock play.
That same respect is also why I don’t like calling a bottom via a short put sale with its more open risk structure in RIG.
And besides, given the call’s near 200% return if RIG manages to ‘simply’ retest its March high of $13.48 by August expiration and possibly fueled by short-covering — that’s not a bad deal in lieu of this oil stock’s own weak-looking operating environment.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.