Replies to post #1480 on Seadrill Ltd (SDRL)

[conix]

Don't Even Think About Buying Seadrill Stock Right Now

? The stock may rise on heavy short covering but each rise will be met by heavy selling pressure.


Richard Saintvilus

Jun 16, 2016 9:45 AM EDT



Shares of contract offshore driller Seadrill (SDRL) continue to sink. After closing at Wednesday at $3.19 they fell in the premarket Thursday to $3.10 and are now down another 2% to $3.13.


Don't even think about buying this stock because things can still get worse.


Based on Wednesday's closing price, shares are now down 8% since I recommended taking profits at $3.47 on June 7. When factoring its high of $5.21 reached on April 29, the stock has lost almost 40% of its value in just seven weeks. The stock has shown a recent trend to bounce higher after falling to its support level of around $3 per share. It's too early to predict if a bounce higher will come, but it's safe to wager on $3 being reached sooner rather than later.



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Given that SDRL currently trades at $3.19, a move to $3 appears small in dollar terms, but it amounts to a 6% decline when $3 has become a solid area of support. From a technical perspective, if the shares were to fall below $3, look out below.


The reason? Seadrill does not trade on fundamentals, and has not done so for over a year. Not only does the company have a massive debt level of about $10 billion (less $1.4 billion in cash), Seadrill has limited routes to grow revenue and profits to service its debt. The recent rally in oil prices, which raised its prospects a month ago, has now begun to fade. Oil prices have fallen for five straight sessions.


Accordingly, Seadrill shares have a consensus sell rating and an average price target of $3, the support level. In other words, if the stock were to fall below $3, where its technicals become broken, $2.50 or even $2 per share becomes possible.


So while the trend of bouncing off $3 may continue, Seadrill must still grow both revenue and profits to pay down its debts. Meaning, $3 shouldn't be seen as a "buy point." The stock may rise because of heavy short covering, but each rise will be met by heavy selling pressure, until oil prices stabilize again. Even that is no longer a guarantee.