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Why Do These OFS Stocks Look Weak?

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Nov. 20 2020, Updated 2:46 p.m. ET

Diamond Offshore Drilling

Diamond Offshore Drilling’s (DO) short-interest-to-equity float ratio is currently 40.7%—the highest among the OFS (oilfield services and equipment) constituents of the VanEck Vectors Oil Services ETF (OIH).

In the past three months, Diamond Offshore Drilling stock has fallen 16.8%, while its short-interest-to-equity float ratio has risen 46.2%. Its net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio is 2.7x.

In the past four quarters, Diamond Offshore Drilling’s revenue has fallen 29.4%. Its adjusted operating income fell 30.2% in 4Q16 on a YoY (year-over-year) basis. Its operating profit margin was 21.1%, as compared to the industry median of -4.9%.

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Tidewater

Tidewater’s (TDW) short-interest-to-equity float ratio is now 36.2%. In the past three months, Tidewater stock has fallen 63.3%, while its short-interest-to-equity float ratio has risen 27.1%. Its net debt-to-EBITDA ratio is now at 22.9x.

For more on Tidewater’s earnings trends, read Part 2 of this series. For a closer look at Tidewater’s position among other high implied volatility OFS stocks, read Part 1 of this series.

Carbo Ceramics

Carbo Ceramics’ (CRR) short-interest-to-equity float ratio is now 31.5%. In the past three months, CRR stock has fallen 15%, and its short interest-to-equity float ratio has risen 10.2%.

In the past four quarters, CRR’s revenue has fallen 48.8%. Its adjusted operating earnings were -$27.8 million in 4Q16, as compared to its operating earnings of -$32.3 million in 4Q15. Its operating profit margin is now at -97.9%.

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Seadrill

Seadrill’s (SDRL) short-interest-to-equity float ratio is now 26.7%. Its net debt-to-EBITDA ratio is 4.5x. Seadrill stock has fallen 76.1% in the past three months, while its short interest-to-equity float ratio has risen 3.3%.

In the past four quarters, Seadrill’s revenue has fallen 30.4%, while its operating income has fallen 13.8%. Read Part 1 of this series for a look at Seadrill’s position among OFS stocks with high implied volatility.

Noble

Noble (NE) short-interest-to-equity float ratio is now 21.4%. Its net debt-to-EBITDA ratio is 2.8x. In the past three months, Noble stock has fallen 33.5%, while its short interest-to-equity float ratio has fallen 1.0%.

In the past four quarters, Noble’s revenue has fallen 52.2%, while its adjusted operating income has fallen 86.3%. Noble’s operating profit margin is now at 36.7%.

Stock prices, short interest, and implied volatility

The high short interest in stocks such as Tidewater, Seadrill, and Noble helps explain why the stocks also have high implied volatilities. Traders pile on short positions when they expect large falls in stocks. Large movements in stocks, along with the expectation of large movements, particularly on the downside, can increase implied volatilities.

All of the above OFS companies with high short interest have seen their revenues fall over the last four quarters, and this could be one of the reasons for the high short interest in those stocks. However, the larger concern is that most of these stocks have seen rises in short interest in the past three months, despite the sharp declines all of them have experienced.

For a deeper understanding of the oilfield equipment and services industry, check out Market Realist’s primer on the OFS industry.

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