Transocean Gets Back in the Game

 | Oct 28, 2013 | 7:00 AM EDT
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Switzerland-based Transocean (RIG) has caught investors' fancy this past week following the announcement that, after a five-year abstinence, the company will once again be returning to the S&P 500. The world's largest offshore drilling contractor will be replacing the recently privatized Dell after the market close Monday.

Transocean has been the center of controversy in recent years. Until 2007, its reputation had been solid, but that year the company merged with GlobalSantaFe and subsequently moved its headquarters to Switzerland in 2008. The move made the stock ineligible for inclusion in the S&P 500 at the time, and is share price plunged from a high of $160.30 in May 2008 to a low of $41.95 by the end of that year.

The price decline coincided with a decline in the company's reputation. Transocean was attempting to recover from these share losses when, in April 2010, its Deepwater Horizon rig in the Gulf of Mexico caught fire, exploded and eventually sank, resulting in one of the greatest maritime environmental disasters in history.

While Transocean has spent the past several years attempting to recover its reputation following the disaster and subsequent fallout, rule changes have once again allowed it to qualify for inclusion in the S&P 500. The current rally, which began Oct. 9, is partially the result of funds shuffling on this recent news -- but Transocean has experienced a technical shift, as well, that has attracted a number of bulls.

For years, the stock's attempts at recovery have been steadily and, at times, swiftly crushed. Since mid-2012, however, the trend has shifted. Rapid bursts of upside momentum have been followed by gradual corrections that have taken place more strongly through time than via price.

The most recent result of this changing momentum began off the Oct. 9 lows. As a result of momentum shifting on a daily time frame, the stock hit three lows since Sept. 24, with each new low barely breaching the prior one. This series of bear traps flushed out the overly eager bulls, but the third low (shown on the daily chart) also created a strong intraday buy strategy Oct. 9. On Oct. 17, this reversal pattern continued on a 90-minute time frame: A base, consisting of two corrective waves along the upper daily price channel, broke to the upside. The news regarding reentrance into the S&P 500 only enhanced this technical move, already under way.

Transocean's rally left the stock testing a major zone of daily resistance last week, but the bulls now have the upper hand and are likely to continue making their presence known. A near-term target of $54 to $55 by the end of the year is reasonable given recent developments, with room for an even greater recovery in 2014.

While the world's dependence upon oil continues to grow, many reserves are quite difficult to procure, and companies specializing in ultra-deepwater rigs have a distinct advantage. Transocean, however, is not the only company in its sector that stands to benefit. Ensco (ESV) and Seadrill (DRL) are also leaders in ultra-deepwater rig technologies, and both have newer fleets than Transocean. Pioneer Energy (PES) is a noteworthy counterpart, as well, in possession of onshore oil-and-gas drilling operations throughout the U.S. and Columbia.

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