This Overlooked Oil Stock Has Short Squeeze Potential

Transocean was just awarded a $252 million firm contract

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Oil and gas stock Transocean Ltd. (NYSE:RIG) made news last month after being awarded a $252 million firm contract for its newbuild ultra-deepwater drillship, the Deepwater Atlas. Additionally, the contract provides for a significant performance bonus opportunity based upon agreed operating metrics. We've covered the red-hot oil sector and its implications for front-month crude, but RIG is worthy a deeper look as well.

Transocean stock didn't move much the day of the news, but is up 63% in 2021 and 269% in the last 12 months. Despite the gains, short-term pressure has emerged as the shares'80-day moving average, a trendline that hasn't been reclaimed on a closing basis since mid July.

RIG Stock Chart

Should RIG conquer this ceiling, analysts may finally start warming to the stock; all eight of the brokerages in coverage maintain "hold" or worse ratings. There's also some modest short-covering potential, considering a healthy 10% of RIG's total available float is sold short.

Moreover, RIG's huge upward stock move can be largely attributed to Transocean making a strong recovery on the bottom-line in recent years. Since fiscal 2017, the oil company's net income has increased by $3.25 billion, with the trailing 12-month net income currently sitting at $120 million. However, RIG's trailing 12-month revenues have experienced a 12% decrease after growing just 6% between fiscal 2017 and fiscal 2020. In addition, RIG has a shaky balance sheet with $7.53 billion in total debt and only $988 million in cash. Transocean stock also trades at a price-earnings ratio of 19.43, which is an elevated value considering the number of inconsistencies with the business’ fundamentals. In conclusion, Transocean stock has likely already seen the majority of its growth from this current run.

 

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