Markets roared back on Friday, Jan. 4 when China said that it would meet with the U.S. to resume trade talks for Jan 7 – 8. Naturally, not all rebounds are equal. China stocks like Alibaba (NYSE:BABA) and JD.COM (NASDAQ:JD) bouncing back do not mean the same as oil and gas stocks like Chesapeake Energy (NYSE:CHK) and Transocean (NYSE:RIG) flying higher.
The beat up energy sector’s potential upside depends less on a U.S.-China trade deal and more so on oil supply. Excess supply hurt oil prices in the latter quarter of 2018. But as the middle east cuts production, oil prices will recover.
Chesapeake Energy, which made a billion dollar acquisition, has the biggest levered upside. Incrementally higher natural gas prices will restore investor confidence. That would mark an end to the stock’s fall to the $1.71 52-week low.
In the ultra-deep water space, Transocean has plenty of upside potential if energy prices hold. It lost half its value in just one quarter when oil prices fell. Its debt/equity profile improved, to 0.78 times. Even though the UDW space is unfavorable due to high, uncompetitive costs, investors get rewarded if Transocean wins more contracts and activity improves.
Disclosure: the author owns shares of Transocean.
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