Slowing global consumption and falling crude oil prices continue to have a withering effect on the oil services sector. Analysts at Citigroup noted as much earlier this month when they lowered their view on offshore drilling companies, stating that they saw weakness in shallow-water rig markets globally. The brokerage firm added that "all drillers" were exposed to shallow-water issues.
More analysts appear to be arriving at similar conclusions, as Friedman, Billing & Ramsey cut its price target on Diamond Offshore Drilling (NYSE: DO, Stock Forum) to $52 per share from $66 per share. Unfortunately for DO, there is plenty of room for more analysts to follow suit. Checking in with Thomson Financial, the current average 12-month price target for the security rests at $94.30 per share - a 62% premium to the stock's Friday close of $57.97.
Elsewhere in the brokerage community, Zacks reports that DO has earned 12 "buys," six "holds," and just one "sell" rating. This wealth of optimism from the analyst community amid declining oil prices and weakness in the shallow-water drilling market could prove troublesome for DO. Furthermore, given the stock's poor technical performance of late, DO could be at greater risk to additional price-target cuts or even ratings downgrades, developments that could send the shares sharply lower as a result.
Speaking of poor technical performance, DO has underperformed the broader market during the past 52 weeks, logging a loss of more than 50% compared to the S&P 500 Index's (SPX) drop of 35% for the same time frame. Zeroing in on DO, the stock's losses have accelerated in recent months. Since peaking at $228.75 per share in mid-July, the equity has plummeted more than 62% under resistance at its 10-week and 20-week moving averages.
The shares are now being squeezed into long-term support at the 70 level, with tentative support emerging near the 60-65 area. Meanwhile, round-number resistance is materializing in the 80 area, and has held DO in check since early December 2008. Complicating matters further, the security's 10-week moving average has descended into the 75 region, creating an additional layer of overhead technical resistance in the area.
Turning to the options pits, speculative investors have grown complacent in regard to DO despite its abysmal price action. The stock's Schaeffer's put/call open interest ratio (SOIR) of 0.85 indicates that calls easily outnumber puts among options with less than three months until expiration. What's more, this ratio ranks near the mid-point of its annual range.
That said, it seems that options traders are finally seeing the light. According to data from the International Securities Exchange (ISE) and the Chicago Board Options Exchange (CBOE), the 10-day ISE/CBOE put/call ratio of 1.04 indicates that puts bought to open have outnumbered calls bought to open during the past two weeks. Additionally, this ratio ranks above 77% of those taken during the past year, underscoring a growing preference for puts that could be a sign that options traders are finally capitulating to DO's downtrend.
Short sellers are also jumping on the bearish bandwagon. During the most recent reporting period, the number of DO shares sold short soared by 33% to 6.22 million shares. Should short sellers continue to pile into short positions, it could increase selling pressure on DO, thus forcing the equity steadily lower.
With brokerage firms beginning to question their positions on DO, the stage is set for another influx of selling pressure on the shares. Add to this mix an unwinding of bullish sentiment in the options pits and potentially staunch overhead technical resistance, and the path of least resistance for DO remains to the downside.