Wednesday’s earnings reports will start to give us an idea of how bad things have become for some oil and energy companies, but the fact is that this won’t be news to anyone, which is why there may be a bullish trade opportunity among the drillers next week.
Transocean Ltd (RIG) is the seventh largest offshore drilling operator in the world. The company operates across the spectrum of offshore drilling environments for private companies and government drilling operations.
Like others in the industry, Transocean stock has taken a beating as it trades nearly 50% lower than its 2015 highs and is now trading at levels not seen since 1994.
Revenue has been on a massive decline, though beating analyst expectations each quarter, along with their earnings per share expectations.
Now, with rig counts down, Wall Street is expecting a 45% decline in the company’s year-over-year revenue and earnings per share of $0.27.
So why would anyone touch Transocean shares right now? Perhaps because of the fact that nobody wants to touch them.
Positive Signs for RIG Stock
When earnings expectations are set low, it makes it easier for companies to come out with in-line or better-than-expected results. The energy sector has seen the largest downside earnings revisions over the last few quarters as oil prices have triggered a domino effect of rig idling. The company is maintaining some of these as “warm” to maintain the ability to begin drilling if contracted, which will happen if oil prices continue their ascent.
Outside of the analyst expectations for earnings, other sentiment indicators tell us that the market is expecting next to nothing from next week’s report. Wall Street’s bullish recommendations for Transocean stock currently runs at 3% making it the least recommended stock in the Oil and Gas Services sector.
Short interest on RIG stock is off of its February highs as short sellers have been getting squeezed out. That said, short interest remains near its two-year highs and leaves plenty of room for additional short covering to push the shares higher.
The potential for an underpromise/outperform earnings result hasn’t gone completely unnoticed, as call option volume on the stock has seen an increase. Activity over the last few weeks has focused on the $11 strike price for the May expiration options.
As of now, the technical picture for Transocean shares shows some support at the $10 level and upside without resistance to the $12.50 mark.
It may not feel like a lot of upside, but that represents a 13% jump in shares that will happen quickly if there are any positive takeaways from this week’s earnings report.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.