Shares of energy services company Oceaneering International (OII -1.73%) rose steadily through the day, briefly peaking above 10% before settling to a 4.3% gain on Thursday. There was no news out of the company, but some key oil sector trends coupled with an updated price target from Bank of America Global Research provided ample reason for investors to get excited.
Oceaneering International provides services, such as drilling and completion, to offshore oil drillers. The recent downturn in oil prices has been particularly brutal because the supply/demand imbalance today is being driven by both sides of the equation. Excess supply has been building for years because of U.S. onshore drilling growth, but was compounded by a recent price spat between OPEC and Russia. They've since resolved the dispute, but it led to increased supply right when the COVID-19 pandemic was causing countries around the world to shut down. That resulted in a plunge in demand pushing oil prices to historic lows.
The energy sector has reacted in typical fashion by cutting back on capital spending plans. The pullback has shown up particularly rapidly in the U.S. onshore space, with the U.S. Energy Information Administration noting that there are fewer drilling rigs working today than ever before in its data.
And while the amount of oil in storage ebbs and flows, the trend appears to be that all the extra oil in storage (put there because of the sharp drop in demand due to COVID-19) is starting to get used. The fact that countries around the world are starting to reopen their economies is a big help on this front, but it also means that the oil being pulled from the ground today is no longer compounding the oversupply problem. All in all, things are starting to look better for oil companies and those like Oceaneering International that serve them.
With the outlook starting to improve, it's not surprising that Wall Street is suddenly reconsidering the story here. In Oceaneering International's case, Bank of America Global Research just upped its price target for the stock by a hefty 25%. And since this particular energy services company doesn't primarily serve the U.S. onshore market, where spending cuts have been swift and deep, it does indeed look like it could avoid the worst of the drilling pullback.
After the quick price jump, the stock is trading above Bank of America's $6 target. And despite the positive news on the oil front, energy prices remain historically low. Basically, the industry is still working through a rough patch, and one good day for the industry (or an individual stock) could just as easily be followed by a bad one. Expect investor mood swings to keep prices in the energy space, including for services companies like Oceaneering International, on the volatile side for a while.