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As Energy Investors Look Through the Scrapheap, This Pattern Looks Like a Gem

As Energy Investors Look Through the Scrapheap, This Pattern Looks Like a Gem

With oil prices potentially moving into single digits and with parts of Canada oil prices falling below $5, you come to the realization that not all companies are going to make it. Those that have little cash, high leverage and terms due relatively soon may cause these companies to go under. On the other hand, this may create an incredible opportunity in some names that have the means to weather the storm.

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  • In recent news, Noble Energy Inc (NBL) has been looking to cut costs. They plan to cut spending by 30% or $500M. The Colorado-based company sees 80% of its cost reduction occurring within the U.S. and over half of the reductions in the Delaware basin. In addition to cutting costs, they have $4.4B in liquidity and has no significant maturities until 2024. This allows them to hold onto the cash for immediate needs rather than having to pay off or roll the debt at a potentially higher interest rate.

    As the share price of NBL fell from nearly $25 to $2.5, it looked like they were headed for the scrapheap. However, it was able to stage a strong rally last week with substantial volume as the stimulus package was about to be signed. The company has received a number of upgrades over this recent surge in the share price as well. The most recent was an upgrade by Stifel from hold to buy and they raised the target from $9 to $18.

    On Tuesday, the price bounced on increased volume. This kind of pattern represents a bull flag formation with a $10 near-term target.

    Option traders may want to consider the 21 AUG 20 $10 call option that closed around $0.45. If the stock fills the March 9 gap and reaches $13 by expiration, the option will be worth $3 over a 500% gain.

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