Goldman: Sell This Oil Stock

Most analysts are already bearish on DO stock

Mar 11, 2019 at 11:19 AM
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The shares of Diamond Offshore Drilling Inc (NYSE:DO) have made a beeline lower since topping out above the round $20 mark back in October. And while the $9 neighborhood has served as a floor during this recent decline -- the lowest the stock ever traded was $8.78 on Jan. 2 -- Goldman Sachs thinks there's more downside to come, with the brokerage firm initiating coverage on the energy shares with a "sell" rating and $8 price target.

Most analysts are already skeptical of Diamond Offshore Drilling, with three-quarters of those in coverage maintaining a "hold" or worse recommendation on the stock. However, the average 12-month price target of $12.01 is a 22.6% premium to current trading levels.

This pessimism is seen elsewhere on Wall Street, with short interest surging 27.2% in the two most recent reporting periods to 23.4 million shares -- the most since mid-September. These bearish bets represent 17% of DO stock's available float, or 8.9 times the average daily pace of trading.

Short-term options traders, on the other hand, are more call-skewed than usual, per DO's Schaeffer's put/call open interest ratio (SOIR) of 0.34 -- in the 6th annual percentile. The March 12.50 call is home to peak front-month open interest of more than 5,000 contracts, and data from the major options exchanges confirms buy-to-open activity at this out-of-the-money strike.

Given Diamond Offshore Drilling's longer-term technical struggles, the activity at this out-of-the-money strike could be a result of shorts initiating an options hedge against any upside risk. Whatever the reason, DO shares were last seen up 2.5% at $9.66, rising as oil prices gain on reports Saudi Arabia may lower crude oil exports next month. Nevertheless, the stock is still staring up at its 50-day moving average, which has served as a stiff ceiling this year.

do stock daily price chart on march 11

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