Shares of Tesco Corporation, a technology-based solution provider for the upstream energy industry, had risen by more than 60% from a 52-week low of $5.13, in just the past two months. The share price currently hovers between $8 and $9. While some analysts are optimistic about the further uptrend in the share price, there are some compelling reasons to believe that the uptrend was simply a relief rally and nothing more.
Fundamentally, the company provides engineering solutions for servicing, drilling, and completion of wells. Tesco has engineering facilities in Europe, the USA, Russia, Latin America, Asia Pacific, and the middle-east. The profitability of the company is directly affected by the increase or decrease in the drilling and production activities of oil and natural gas companies. In other words, the rig (exploration) and well count (production) determines the revenue of the company. Indirectly, revenue and earnings are dependent on the price of crude oil and natural gas.
Crude oil, which is currently trading at about $40 per barrel, has recovered more than 40% in the past two months. The price faces stiff resistance near the 40 levels. Most analysts believe that the price would go below the level of $30 per barrel in the next few weeks. Thus, the near-term prospect of an increase in revenue for Tesco is very less.
Between 2014 and 2015, the rig count has decreased by 48% to 977 in the USA. Similarly, in fiscal 2015, the rig count in Canada has declined to 193, from 380 in the prior year’s corresponding period. The number of rigs in Africa and Europe has decreased by 28%. Globally, in fiscal 2015, the average decrease in the rig count was 35%. With crude oil oscillating between $30 and $40 per barrel, there is a negligible chance for an increase in the rig count in the nearby future.
In fiscal 2015, the well count in the US decreased to 28,692, from 47,402 in fiscal 2014. Likewise, in fiscal 2015, the number of Canadian wells declined to 5,309, from 10,513 in the prior year similar period. Globally, in fiscal 2015, the well count decreased about 25% to 75,969, from 104,127 in fiscal 2014.
The rig and well count are expected to go higher only when the price of crude crosses the level of $60 per barrel. The market analysts believe that the price of crude will cross $50 only by year-end. Thus, fundamentally, the share price can be expected to remain range-bound with a bearish bias.
Technically, the chart reveals that the stock has major support at 6.80. On the upside, major resistance exists at 8.80 levels. The stochastic indicator reflects an overbought scenario.
Our recommendation is for binary options traders to purchase a one-touch put option contract with expiry in the last week of April. A target level of about $7.50 would be ideal for this put option trade.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
