Each week, I’ll give an overview of a stock and Licia Leslie will follow that up with a chart analysis the next day. Bill Griffo will chime in with macro analysis and Andrew Giovinazzi will then finish out the week with a volatility breakdown.

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Hey Traders,

One of the things I keep hearing is “When will oil stocks go up?”

My answer: They already have.  

Here is a two year chart of the Energy Select Sector SPDR Fund (Ticker: XLE):

And here’s a two year of the SPDR S&P Oil & Gas Exploration & Production ETF (Ticker: XOP):

While neither of these are on the highs, they’re significantly higher than they were two years ago. 

But there are those that see the value in energy as still much higher than current levels. Others will tell you that green is the future, and oil is going nowhere fast.

Today I want to take a look at a smaller oil name, one that at one point was a high flier then left for dead. But now it seems to have woken up.

I’m going to break down Transocean LTD (Ticker: RIG).

The Good

RIG, like many oil stocks, has had a really nice run over the last two years. While off its high from February, at a price of 5.75, it’s well off its lows as well.  

One benefit of the run up in the stock has been a reduction in the debt to equity ratio – it’s significantly lower than it was 10 years ago. 

They’ve also, until the most recent year, reduced their long term debt – something that needed to be done for the company to get off the mat.

The company has over a 1.00 in cash per share and a book value of 14, more than double its current stock price. If you like EBITDA, the company made $883 million on a really nice revenue of 2.64 billion dollars. That’s 3.69 per share in revenue.

The revenues have been growing as oil has managed to stay above 70. If oil can get a rally to 90, a case that many are arguing for (although there are a fair number on the other side as well), RIG could turn profitable quite easily.   

The Bad

That last sentence kinda sums it up … if oil can get to 90 and stay there for a while. 

This is a company that is losing money due to debt. They haven’t turned a profit in six years!  

The falling debt to equity ratio has also stopped. The company saw its long term debt actually start to increase this year:

I don’t like that. If debt keeps going up, and it continues to be much cheaper to produce oil out of shale, the case for offshore drilling is going to fizzle.

The run in the stock is nice, but appears to be unjustified based on the numbers I’m looking at.  Especially if you don’t like EBITDA and instead you like net income … of which there is none.  

And this is not an Amazon Inc (Ticker: AMZN) where they purposely lose money …

This company just loses money.

The Verdict

I like oil plays, but not this one. I might take a look at this below 3.00 if I think I see an oil rally coming.

But other than that, stay away.

Questions about that? Leave a comment below!

Your Only Option,

Mark Sebastian