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A Bet on Deepwater Drilling in the Wake of Energy Embargo

Summary

  • EU is determined to wean itself off Russian oil, energy prices are skyrocketing while offshore drillers lag behind.

  • Technical analysis indicates all-time bottom for RIG stock.

  • Transocean successfully weathered all storms so far.

  • Its leveraged position promises significant upside once dayrates really take off.

Background

EU is determined to go off Russian oil and eventually gas. There is a lot of debate in the media whether EU can do and when. The sheer scope of analysing EU energy scenarios is beyond my investment blog, however the headlines made me dust off Transocean (RIG) charts that I have been tracking for the last several years.


The below long-term chart illustrates the history of stock with huge price range over the years when the offshore drilling industry skyrocketed prior to 2008 on the fears of peak oil and then collapsed first during recession of 2008-2009 and then again due to shale oil revolution in the US that pushed the whole offshore drilling industry to the brink of insolvency.


RIG, Weekly

The wave count prior to the peak is loud and clear ABC. The count on the way down has a clear contracting triangle in the middle and a contracting leading diagonal at the bottom that both serve as a strong indication of a completed WXY move.


With energy industry going straight up on the back of rising energy prices, inflation fears and so on the offshore drilling industry lags behind as it has just went through the series of debt restructurings and bankruptcies.

Transocean Ltd. has survived (though bankruptcy option is still not completely off the table), slimmed down its fleet having decreased fleet average age and focusing on ultradeep water niche where there is no real competition.


The company is more leveraged (54% debt-to-equity) than competitors (Valaris, Noble Corporation) that pins stock price down but in the event of dayrates reaching an inflection point and going bananas this can result in the significant upside. More here - https://seekingalpha.com/article/4478412-transocean-get-ready-for-dayrate-inflection-point.


Fundamentally the company is 73% undervalued - https://simplywall.st/stocks/us/energy/nyse-rig/transocean.


Oil Price

Oil price has been moving straight up without deep corrections since COVID shock and looks like it is getting ready for another thrust in wave iv that can be extended as it often happens with commodities.


During Fifth wave moves in commodities, there would be a plentitude of fear of inflation/war, and at times ridiculous news flowing out, or highly charged up investors who are blindly positive about the market. We have seen such euphoric news coming out in Crude Oil market, just before, there is a big correction.

Anand James, Commodity Analyst, Geojit,

Elliott Wave Principle and Commodity Market Psychology


USOIL, Weekly

When EU first mentioned oil embargo on Russia as a possibility the stock price of RIG reacted immediately +37.5%. Though later it has returned to the previous values as negotiations with Hungary dragged on.


RIG, 1 hour

Judging by the news there is a momentum behind embargo talks and my charts confirm that. Therefore I consider RIG to be a buy opportunity with xxx% potential with price travelling beyond 2008 high eventually.


RIG, Weekly

Regards, Denis F.


Disclaimer: This is not an investment advice but a mere sharing of a personal view on the market.












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