Why This Offshore Player Deserves A Second Chance

There are many big differences between trading and investing from “inside” the market and doing so from “outside”. When you are sitting at a trading desk and following markets every minute of every day you can be fairly sure that you don’t miss much. When a move looks illogical, therefore, it probably is and you react with the appropriate confidence. On the outside, however, when something is moving in a way that defies explanation one’s first reaction is normally “What did I miss?” That is the thing I keep asking myself when I look at Transocean stock (RIG).

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Regular readers may recall that about a month ago I wrote a piece recommending RIG. At the time the stock was trading at just above $12 and the idea was to buy with a stop loss just below the $11.70 support. If you did so the trade looked good over the next couple of weeks as RIG climbed to just over $13, but then it turned. The stop was hit on Wednesday and under normal circumstances that would be that.

My trading style dictates, however, that when a stop loss level (or a target for that matter) is hit, I re-evaluate the original thesis. I was taught to do things that way as it reduces the temptation to commit what the old hands in the interbank forex market where I started saw as the ultimate sin…averaging a loser. Over the years I have found that to be the case. Once a position is closed the emotional urges that make averaging so appealing are nowhere near as strong and it is possible to look quite dispassionately at what you got wrong.

Usually that analysis shows that you missed something or built in an expectation that never came about, and in that case you just move on and look for another trade idea. Sometimes, though, the original thesis still holds. All of the reasons that the trade looked attractive in the first place still apply, and at the new level it looks even more attractive than it did before. To use an old market cliché, if you liked it at X you must love it at Y.

In many cases that can be dangerous thinking, but if you trade in a disciplined manner there is no reason not to try the same trade multiple times at different levels. Setting and sticking to a fairly tight stop enables you to have a couple of cracks at something and get the timing wrong yet still make money overall when a subsequent attempt works out, and the more I look at RIG at these levels the more I think it is the case here.

The original argument, that the current White House is opening up offshore oil fields and that that will benefit Transocean both as an E&P company and, even more impactfully as an offshore drilling service company, still holds. So does the contention that oil is essentially range-bound right now, but at levels that allow for profitable offshore production. Of course none of that would matter if Transocean was failing to execute and had been reporting hugely disappointing performance, especially as Q1 2017 earnings are due in a couple of weeks. A glance at RIG’s earnings surprise record (below), however, immediately dispels any such notion.

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So here we have a company that has been knocking it out of the park and that has an improving macro environment, yet whose stock continues to fall. I understand that it is to some extent to do with the suspension of the dividend and that Transocean’s board continues to give conservative guidance, but the latter is shown to be a red herring by the table above and if things continue that way the dividend will be reinstated soon.

Given all of that RIG looks like worthy of a second chance. This time a stop loss just below the launch point of the run up at the end of last year, say somewhere around $10.25, looks appropriate. If that is hit I will look again, but for now all of the original reasons to buy still apply, so I for one am still a believer.