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Ease Out of Peaking Oil Drillers

This column was originally published on RealMoney on April 26 at 1:38 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

Back on Feb. 17 , the "Ocean's Seven" gang of oil drillers was poised for a rebound after hitting bottoms not long before. Now it's time to book some profits on the possibility that the oil drillers peaked between April 19 and 25.

Four of the seven oil drillers bottomed on Feb. 15, with the other three going deeper into the ocean floor into March. Now, six of the seven -- Baker Hughes (BHI), Diamond Offshore (DO), GlobalSantaFe (GSF), Halliburton (HAL), Noble (NE) and Transocean (RIG) -- have reached 52-week highs over the past five trading sessions.

In February, I encouraged investors to add to positions on weakness to value levels. (A value level is a price at which my models project that buyers will emerge.) Now, with the energy sector 25.6% overvalued, the oil drillers have become overvalued and are becoming overbought. The only member of the Ocean's Seven that is trading around its fair value is Nabors (NBR).

Nymex crude oil penetrated and held my monthly pivot at $67.40 on April 5 (a pivot is a value or risky level that has been breached in its particular time horizon; the stock will likely trade around this pivot), energizing another momentum run, which reached an all-time high at $75.35 last Friday vs. my quarterly resistance at $75.94. The weekly chart profile shows rising momentum and a level that is just below becoming overbought. My model projects that crude oil prices have set a ceiling for the second quarter, and this justifies profit-taking in the Ocean's Seven.

The oil drillers began reporting earnings last Friday, with Halliburton and Noble beating estimates. Baker Hughes and Diamond Offshore reported before the open this morning, both beating EPS estimates. But keep in mind that positive earnings have been anticipated with the recent highs in share prices. Next week, GlobalSantaFe is expected to report EPS of 62 cents on May 3, Transocean is expected to report EPS of 48 cents on May 4, and Nabors is expected to report EPS of 74 cents on May 7.

Investors who added to positions after my Feb. 17 column should reduce holdings by 50% on strength to a risky level, or have a sell stop to protect gains made since February. (A risky level is a price at which investors are likely to reduce holdings, according to my models.)

Drilling Down on the Oil Drillers
Company Name (Symbol) April 25
Closes
Rating % UV/
OV
Fair
Value
MOM 5-Week
MMA
Value
Levels
Pivots Risky
Levels
Baker Hughes (BHI) $75.93 HOLD 18.80% $63.92 RM $70.69 66.74 Q 73.70 M none
Diamond Offshore (DO) $93.81 HOLD 12.10% $83.71 OB $87.26 78.30 Q 89.15 Q none
GlobalSantaFe (GSF) $63.00 HOLD 17.50% $53.63 OB $60.62 53.04 Q 60.73 M none
Halliburton (HAL) $78.82 BUY 15.50% $68.24 RM $75.26 69.15 Q 84.31 M
Nabors (NBR) $37.47 BUY -3.10% $38.69 RM $35.95 31.86 A 37.98 Q 40.52 M
Noble (NE) $82.40 HOLD 13.50% $72.59 RM $80.21 77.29 Q 84.93 M none
Transocean (RIG) $84.00 HOLD 15.50% $72.76 RM $81.00 79.79 M 84.14 Q none
Key: OB, overbought; DM, declining momentum; RM, rising momentum; OS, oversold; M, monthly; Q, quarterly; S, semiannual; A, annual. A value level is a price at which my models project that buyers will emerge; a risky level is a price at which investors are likely to reduce holdings, according to my models. A pivot is a value or risky level that has been breached in its particular time horizon; the stock will likely trade around this pivot.
Source: Global Market Consultants

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