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Here's Why McDermott International Stock Is Up 12% on Friday

By Jason Hall – Updated Oct 11, 2019 at 1:24PM

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The stock market is rallying. Oil prices are up. Investors are overlooking something very important with McDermott.

What happened

Shares of McDermott International (MDR), the energy industry-focused construction and engineering company, are up 11.8% at 12:30 p.m. EDT on Oct. 11. It looks like a number of factors are at play for today's surge, including higher oil prices that have a number of oil stocks up and a strong rally on Wall Street that has the S&P 500 up nearly 1.5% on the day.

So what

Two of the world's most important crude oil benchmarks are up big today. West Texas Intermediate, the key measure of oil prices in the U.S., and Brent, a major international benchmark, are up 1.5% and 1.2%, respectively, at this writing, following news of an Iranian oil tanker being attacked off the coast of Saudi Arabia.

Screen capture of oil and gas prices going higher.

Image source: Getty Images.

The other big news today is driving the entire market up. U.S. President Donald Trump is set to meet with Chinese Vice Premier Liu He, increasing investors' hopes that the two countries can start moving past the ongoing trade war that's threatened to derail the entire global economy.

To put it plainly, a weakening global economy would be terrible for the oil industry, which is at risk of oversupplying global markets if consumer demand -- the key driver behind global oil consumption -- were to fall, sending the world into recession. So signs of hope like today's meeting between the U.S. and China are stoking optimism.

Now what

A healthy economy -- hence a healthy oil and gas industry -- is a necessity for McDermott right now. The company continues to face down very real risks of bankruptcy, with a heavy debt burden and core operations that have burned more cash than they generated in recent quarters. If the energy sector were to further weaken, that would potentially amplify the company's struggles, since one of the first things many energy firms will do during a downturn is cut spending for the projects McDermott makes a living on.

And frankly, today's oil news doesn't really offer much by way of optimism to justify a double-digit jump in McDermott's stock price. Sure, it has some options to raise capital, including selling off some of its high-value assets. But even those moves would come with the negatives of giving up on some of its most profitable operations simply to buy time to fix what's broken.

Put it all together and McDermott's future is very cloudy, and it's a high-risk stock that most investors should avoid. The risk of permanent loss of capital before there's clarity on the company's ability to avoid bankruptcy is substantial at this stage. Better to miss out on the bottom if it does recover than be wrong and lose your entire investment. A smarter move is to let the story play out before putting any capital at risk on odds that don't look very favorable for investors right now.

Jason Hall has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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