Attempting to trade or invest in the energy sector on long-term fundamentals has been a tricky proposition lately. Oil futures, and therefore most energy stocks have been bouncing around, driven by headlines about international trade, U.S. politics, and escalating conflict in the Middle East. Over time though, the short-term effects of those headlines will be outweighed by the medium to long-term trends inherent in the underlying stories, and that makes it worth returning to an old favorite stock for trading, both long and short, Transocean (RIG).
What makes RIG attractive as a trading vehicle is that its low price (around $4.60 at the time of writing) and high volatility (it recently gained around 50% in just over two weeks, then lost 50% on a retracement) make it effectively like an option on itself. Of course, while that creates the potential for great returns, it also increases risk, but that makes it the ideal candidate for the kind of trade I like, with strictly adhered to, tight stops and a good risk/reward ratio.
Before we get into the technical aspect of those levels, let’s look at why there is a medium-term bull case to be made for the stock.
Transocean specializes in offshore oil exploration and production, a sub-section of E&P that has been out of favor for a while. Improved fracking technology and a White House and EPA that are open to expansion of onshore drilling have significantly lessened demand for relatively expensive to recover…