RIG – A potential short squeeze candidate?

Back in August 22nd 2020, I wrote an article on Transocean (RIG) and presented the thought that the company is not planning to file for bankruptcy. At that time many oil and gas companies were filing for chapter 11 and going out of business. That’s when one top analyst suggested that RIG should also file for bankruptcy. The stock tanked and was trading around $1 per share. Many investors were almost certain that the company would go under. Investors were running out the door as fast as they can. After some digging and some investigating, I concluded that the company has no plans to file for bankruptcy and shared my thoughts in that article. You can read it here “Should Transocean RIG file for Bankruptcy as one analyst suggested?”. I said RIG could be at least 5 bagger stock if they manage not to file for bankruptcy.

Current situation

Fast forward, and as of last Friday Jan 29th 2021, RIG stock price closed at $3.36 per share. That’s more than 300% appreciation from the time when I wrote that first article. Even now, I continue to think that RIG is still undervalued and potentially poised for some short squeeze action in the near future.

What are the reasons?

There are many reasons that leads me to this thought. First, I believe RIG had managed to dodge filing for bankruptcy and that by itself should put RIG share price back to pre-pandemic levels of around $5 a share. Second, the last earning report showed some signs of improvement in their business. The company managed to beat the street estimates and make some profit after a very long time of reporting negative earnings. Third, oil prices have been on the rise for the past few months and that always help oil drillers raise their rates and thus more profit. Fourth, Biden winning the elections. This in particular is an interesting point because of Biden’s policies on oil fracking in the United States. Biden will try to limit or discourage oil fracking which will lead to oil supply squeeze. This will benefit oil drillers as oil prices will rise and companies will look for alternatives to oil fracking to balance the shortage in oil supply. The alternative is off-shore drilling and that is what RIG does. So, this might lead to more business for RIG.

Short squeeze candidate?

So why I think RIG might be a good candidate for a short squeeze? First let’s take a look at the short interest on RIG. According to Yahoo Finance, there are 100 million shares shorted as of Jan 15th 2021. That is about 17.3% of float. The prior month had a bigger number of shares shorted around 117 million. Although short sellers have been covering their positions, there are still a large amount of shares shorted and will need to be covered if the stock price keeps on climbing. This will create more pressure on the stock upward trend.

A short squeeze frenzy era

Recently the topic of short squeeze has been a hot one. The very famous and trending story is the short squeeze on GameStop (GME). The stock price has rising more than 1600% in like a month. GameStop was heavily shorted with more than 140% of short positions compared to float. The case of GameStop is different, as the upward trend was not a result of underling business improvement, but it was rather because of retail investors identifying that hedge funds are heavily shorting the stock. Using social media they orchestrated a buying spree of GME stock which pushed the stock price upward and forced hedge funds to close their shorting positions. With so many shares shorted, this created a squeeze on the price of the stock and kept pushing it up.

In the case of RIG, I believe the upward trend is justifiable with the reasons I identified above. I believe the underlining business improvement will continue to push RIG shares price upward and that will continue to force short sellers to cover their short positions and put more pressure on the stock price to go upward. The intensity might not be as big as the short squeeze that happened to GME, but if it happens it can push RIG stock to go higher significantly from what it is now.

As a disclosure, I do own some shares of RIG. I own them because I believe in the underling business for oil drillers in the coming few years, and not because of a short squeeze potential. I am long on this stock.