Seadrill Ltd (NYSE: SDRL)
In spite of a sharp decline in oil prices on Friday, Seadrill continues to hold its November gains, with the share price appreciating by more than 22% since the beginning of month.
Drilling For A Breakout
Seadrill’s stock, like others that are working hard for that black gold, has been drilled this year down in excess of 60% from its 52-week high.
The positive change in sentiment, though, appears to be related to forecasts regarding the future prices of oil. Despite Friday’s 3.9% loss, spot oil has been staging a strong rally during the past week, and with comments out of Iraq that they will apparently be amenable to an OPEC arranged price fix, investors are speculating that oil may find a short-term home in the $55.00 -$60.00 range.
If oil does find a home in that range, Seadrill may have some opportunity to do some repair on its cash flow and balance sheet. SDRL is already well into restructuring its debt with strong insider participation. Once the debt is restructured, analysts may be willing to breathe a sigh of relief and begin to recommend SDRL to their trading desks.
While poor management decisions play a large role in SDRL being caught in a balance sheet fiasco, the tremendous drop in oil prices also weighed heavily on SDRL’s stock price.
However, with oil rebounding, and with intense focus on restructuring the debt, investors appear willing to bid up the stock as early adopters for a potential break higher.
Despite the rally in the share price, SDRL management has warned of a challenging business climate in 2017. For SDRL, having a decent amount of future orders already on the books is helpful, but managing the cash burn is going to be critical for management in 2017. Restructuring debt without a market to support even the new terms may offer financial savings, but not complete cover.
Investors should be cautious about relying on an OPEC cut to be the impetus to move SDRL higher. Investors have heard the OPEC story before, and in each case, the cartel has been unable to come to an agreement for production output and an agreeable price range per barrel.
In each instance over the prior year, these OPEC talking points led to a strong rally and investors were wise to take the profit prior to the actual meeting. Regardless of the rhetoric this time around, SDRL needs to remain focused on its core business and continue to cuts costs and expenses in every department of the business.
Having fingers crossed for higher oil prices is not a strategy; it’s a wish. And, for investors that are hanging on for that wish to come true, history is telling them to remain cautious.
Disclosure: I have no position in any stock mentioned and no plans to initiate any positions within the next 72 hours.
I wrote this article myself and it includes my own research and expresses my own opinions. I am not receiving compensation for it (other than from CNA Finance). I have no business relationship with any company whose stock is mentioned in this article.
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