I'm going to keep this relatively short and sweet.
Back in late December 2014 I bought ( RDC ) at a cost basis of ~$20 for the following reasons:
- The bulk of RDC's most critical assets are contracted through 2015 and into 2016
- Strongest balance sheet (lowest debt leverage) compared to other offshore drillers in the industry
- Management team considered best in industry
- Long term buyers appeared to defend the $20 share price level
- At ~$20 the price to book is an absurd 0.5! Simply put you can purchase a $1 worth of assets of for $0.50!
I was able to take profits at ~$23 and ~$22 for an average gain of ~12.5% on the position. Not bad considering the highest the stock price reached was ~$24, before February's run up to $25.
Fast forward to today. I bought back in at approximately $20.66 with a stop around $19.25 and a price target of ~$24. All of the above reasons still apply plus the following:
- RDC took ~$430 million in asset writedowns for its 12 oldest rigs. As a result of the impairment charge they reported a loss in Q4 earnings. Therefore the new price reflects this new negative information.
- Additionally ( HERO ), another offshore oil driller, recently had a long term contract cancelled by Saudi Aramco. All offshore companies and their investors were put on notice that contracts can and will be cancelled if the day rate is too high, and as a result offshore drillers' share prices tanked. Again the current share price reflects this added revenue uncertainty.
- The stock price has once again held the $20 level.
Considering the aforementioned factors I believe this is a solid entry based on the risk/reward setup.
Remember as traders/investors our only goal is to develop the skills to identify and exploit asymmetries in the market. We will never be right 100% of the time, but with proper due diligence, risk management, and belief in the process we can certainly be profitable over the long term.
UPDATE: Price action was terrible in the week that followed this post, with a violent break towards $19 violating my stop price. With recent reports of still record supply coming online, ( USD ) strength, the price of oil and market sentiment is likely to be suppressed for some time. ( RDC ) is also exposed to concentration risk per the following Seekingalpha report:
The lesson is stay disciplined with your trades and mentally flexible. Always be looking for new relevant information that could affect your trades/positions.