Shares of oil drilling contractor Nabors Industries (NYSE:NBR) soared on May 28, gaining 16.4% from the previous day's close. The big jump was the product of a share price target increase by a Wall Street analyst.
An analyst with Citigroup significantly lifted his price target for Nabors today to $35 per share. That's more than double the prior $15.50 target and a surprising move considering how far demand for onshore drilling activity has fallen during the 2020 oil crash. The analyst, Scott Gruber, cited steps to preserve liquidity and cut costs as being key reasons for the price upgrade.
The interesting thing about today's huge spike for Nabors stock is that it was already trading well above Gruber's revised price target, closing yesterday at almost $39 per share. Moreover, Gruber continues to rate the stock "neutral" with the risks that demand for drilling activity could further deteriorate.
So what pushed Nabors stock up so sharply? In short, it's almost certainly short-sellers getting scared out of the stock, i.e., buying shares to cover their position. Over the past few months, the percent of Nabors stock sold short has gone up 133% from an already high 9.6% to more than 22% at the last count.
And a lot of those shorts have been burned terribly. Nabors stock price has gained 343% since prices bottomed out on April 22. As a result, shorts who have closed their positions over that time have had to pay substantially more -- potentially a lot more -- than what they collected when they sold it short.
This is exactly the risk of shorting a stock: If the stock goes up, your losses only go higher.
With that said, don't let the massive run-up in Nabors' stock bely the reality: The company faces a hard road ahead, and despite a high-quality fleet of powerful and advanced drilling rigs, the 2020 oil collapse and likely recession will have major ramifications for its results. Combine that with a debt-laden balance sheet with upcoming maturities it doesn't have the liquidity to pay off today, and investors should tread lightly.