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Citi Sees 'Pair Trade Nirvana' In U.S. Oil Services Group

Citi Sees 'Pair Trade Nirvana' In U.S. Oil Services Group

  • Citi believes that offshore drillers remain stock pickers’ territory.
  • While it might take years for share prices to recover, the firm sees risk to the upside.
  • Citi suggests pair trades as a way to eliminate much of the downside risk in the space.
  • In a new report, Citi Research analyst Scott Gruber looked at oil services stocks and suggested a couple of pair trades for traders that want to protect against further downside in oil prices.

    Gruber believes that the fundamentals of offshore drillers will likely not be improving anytime soon, but he does believe that certain companies are better positioned than others for an eventual recovery.

    Waiting Game

    Gruber believes that, for offshore drillers, recovery in business is not as simple as watching for a spike in oil prices. He believes that even if Brent prices reach $70/bbl, oil majors are unlikely to raise capex for the time being.

    “The volume of idle rigs plus pending newbuilds should delay the call to reactivate mothballed rigs, thereby deferring a key catalyst to rate reflation,” he added.

    Related Link: Halliburton, Other Oil Services Firms Suffer Vs. Year Ago As Oil Slides

    Risk To Upside

    Despite the bleak fundamental outlook for offshore drillers, Gruber sees more risk to the upside than to the downside from current levels. However, he believes that shale service providers are likely to see a quicker recovery than offshore drillers will.

    Pair Trades

    For traders that are worried about another leg down in oil services stocks, Gruber suggests two pair trades that will help traders profit off the relative outperformance of Citi’s top names:

    • 1. Long: ENSCO PLC (NYSE: ESV)
      Short: Transocean LTD (NYSE: RIG)
    • 2. Long: Rowan Companies PLC (NYSE: RDC)
      Short: Diamond Offshore Drilling Inc (NYSE: DO)

    In addition to the two pair trade suggestions, Citi initiated coverage of Noble Corp plc (NYSE: NE) and Pacific Drilling SA (NYSE: PACD) at Neutral.

    Disclosure: The author holds no position in the stocks mentioned.

    Image Credit: Public Domain

    Latest Ratings for ESV

    Jun 2019ReinstatesUnderperform
    May 2019Initiates Coverage OnOutperform
    Apr 2019Initiates Coverage OnOverweight

    View More Analyst Ratings for ESV
    View the Latest Analyst Ratings

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