
Trade Update: Take Profits in Seadrill
Oil prices have begun to rise, which has sent shares of Seadrill (SDRL) - Get Report soaring almost 14% since I last recommended the stock on May 27. The fact that Seadrill shares had, at the time, declined more than 7% on its earnings miss created a solid contrarian opportunity too good to pass up.
But it's now time to take some profits and move on.
Although Seadrill can still deliver some gains if oil prices rebound higher, the company's net debt position of around $10 billion makes the stock too risky for a long-term hold. Getting in for a quick gain and getting out in a timely fashion is the best way to play these shares, at least until Seadrill's fundamentals drastically improve.
Seadrill shares closed Monday at $3.47, up 9.97%. The shares are now up 2.36% year to date, compared with a 3.2% rise in the S&P 500 (SPX) index. Given that the stock has declined more than 72% in the past 12 months, being in positive territory in 2016 should be considered a win.
But Wall Street is not completely sold on the company's recovery. Seadrill shares have a consensus sell rating and an average price target of $3, 13% lower than current levels. We can use this negative sentiment to our advantage and profit from the volatility in Seadrill shares.
Take a look at the chart, courtesy of TradingView.
Seadrill stock has plummeted 33% since reaching a high of $5.21 in May. This was driven by massive short covering as traders placed the wrong bet and the company surprised the market by reaching an agreement to extend its debt maturities. Both those gains were met with heavy selling as long investors locked in the profits they could get after a long decline.
Beyond those events, Seadrill has not diverted from around $3 per share, which is where the stock has established support, shown by the blue arrow. The trend of bouncing off $3 per share will likely continue for the foreseeable future or until Seadrill begins to grow both revenue and profits to allow it to pay down its debt.
With the stock now at around $3.47, taking profits is the smart move. Then wait for the shares to fall back to support, and buy back in, until the chart says to do otherwise.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.










