I’m confused how oil jumps over $61 and RIG drops? They report Monday AH correct? I’ve never listed to there CC but would like to hear it Monday if I can. I probably wouldn’t understand some of there verbiage..
Bird, this is the typical reality of "contrarian" investing in "turnaround" candidates.
There are a lot of speculator-traders who are taking profits in the wake of RIG's 200+% rise off of it's lows,
especially when so many pundits who dislike ANY unprofitable company keep writing negative articles to
fuel their pessimism... like this drivel from an idiot at Motley Fool that wouldn't know this company from a hole
in the ground:
finance.yahoo.com/m/e43e3e1e-fbb8-325d-9261-1a06140f3769/3-energy-stocks-to-avoid-.htmlMost people don't fully evaluate the chain of events that would lead to an eventual recovery of a company
like RIG:
1. An oil bust shuts down drilling and oil producers drain reserves without replenishing them.
2. As oil prices recover, oil producers must repair their balance sheets before committing to additional
drilling. Banks are reluctant to lend them money. reserves keep declining without replenshment
(this is where we are in the current cycle, IMHO).
3. As oil prices continue recovering, oil companies begin increasing drilling budgets with their most
lucrative prospects. In this particular cycle, there is also political factors involved, like Biden's drilling
ban on federal lands/waters, pressure on oil companies and banks not to finance oil projects in lieu
of "green" renewable energy.
4. As tightness in oil supplies and higher demand sustain or increase oil prices, rig tenders begin to heat up
and quoted dayrates begin to recover. Once the availability of rigs hits a "flash point", dayrates spike as
companies vie for any rigs that remain, or offer to contribute to the re-activation of cold-stacked rigs.
5. As higher dayrates apply to new rigs, other rigs that are still contracted for upwards of 1 to 3 years at
lower dayrates still drag on revenues. Backlog begins to spike higher, but revenues lag.
6. As more and more rigs turn over at higher dayrates, revenues rise strongly, but profits rise more grudgingly
at first.
7. 2 years or so after #4 above, a critical mass of rigs turn over onto new, higher dayrates such that
both revenues and profits are rising rapidly. Since most costs involved with operating a rig are
"fixed" costs, a doubling of dayrates in the boom portion of an oil cycle tends to flow almost entirely
to companies' bottom lines. This is the reason for the boom/bust characteristic of the offshore drilling
industry.
Historically, the initial moves in the stock prices (the highest percentage moves, as we've just seen since
RIG's stock price rose from below $1.00 to around $3.50) occur at cycle points #2 and #3 above. But once
we're at #4 above, these stocks move in higher "dollar" amounts, but lower and lower "percentage" rates.
Once the cycle hits #6 and #7 above, people like that lady writer at Motley Fool (above) start getting excited
and jump into something like RIG after the best gains have been made. That's when I start looking to
dollar-cost-average some sales of RIG stock.
Of course, there's plenty of risk along the way with oil cycles like I've outlined above. Remember that the
world first entered the oil slump back in late 2014 and there have been false starts before now. The recovery
was actually beginning for a second time last winter when Covid hit. Remember, oil cycles CAN be interrupted...
... like if a mutant strain of Covid were to surface that's as deadly as Ebola and resistant to vaccines... ANYTHING
can happen, so stay diversified. Transocean may be the strongest and largest offshore driller, but the company
is still a B- to CCC rated company so any serious setback does expose the company to potential bankruptcy.
But that said, we're approaching 7 years since oil first entered glut. That's a record long glut, and reserves
world-wide, aside from OPEC+ and U.S. shale notwithstanding, have dropped considerably over those 7 years
without significant replenishment. And replenishment may be curtailed beyond rising demand to over 100 million
barrels per day by next Christmas, given that banks are so stigmatized against lending to oil companies and so
many big oil companies are politically pressured to divert oil exploration money toward renewables.
But, as I've said before, I think deepwater drilling contractors stand to gain by many of these trends, since most
"sovereign" drilling entities (like smaller, developing countries) have no such constraints... and a high percentage
of THEIR proven reserves are increasingly in deep water, as land-based reserves and shallow water prospects have
mostly been drilled over the decades.