A Play On Oil – Noble Corp. (NE)
While BP and Transocean are tied up trying to clean up the Gulf mess, stocks in the entire sector were dragged down on the news. This presents a buying opportunity in the right companies.
Noble Corp (NE), an oil and gas drilling contractor, has been trading in a well defined parallel channel ranging roughly between $39. and $45 since Oct., 2009. This looks like an extended bull channel and NE has just bounced off the bottom of the channel and is now trading at $39.27.
The slow stochastic has just given a buy signal and from oversold levels. There is also a doji candle stick that many times indicates a price reversal. The chart on NE looks bullish and the stock has been consolidating for 7 months. I believe NE could quickly trade to the upper end of the channel at $45 and then break through the top end to see even higher prices.
I don’t believe the Gulf situation will stifle world-wide oil exploration and NE has clients around the world. China and India are thirsting for oil so exploration will continue regardless of any mishaps. With rising oil prices and more equipment being tied up in the Gulf of Mexico I believe NE’s assets will become more valuable.
One could buy the stock here for a possible 15% gain. I would set a stop loss at $37.70 and look to take profits at or near $45. You are risking $1.57 per share loss for a $5.73 per share gain. Your reward to risk ratio on the trade is a healthy 3.64 or 364%. In other words you will make $3.64 profit per share if the trade goes well as opposed to taking a $1.00 loss per share if it doesn’t.
Another possible way to play this is to buy the NE June 41 calls for around $1.50. Your break even point is the stock hitting $42.50 before expiration. If NE hits $44. your options will be worth $3.00 and you will have doubled your money. You would probably want to sell your calls at a loss in order to preserve capital if the stock hits $37.70.
