Shares of energy services provider Transocean (NYSE:RIG) rose by a huge 25% in December according to data from S&P Global Market Intelligence. That's a massive increase, but it comes off a very low base, given that even after the December advance the stock was off by 66% in 2020. Both of those numbers come right back to oil.
Transocean's customers are energy exploration and production (E&P) companies. The relationship is fairly straightforward. When oil prices are high, E&Ps tend to invest heavily to find and produce new oil. When oil prices are low, E&Ps pull back on such capital investments. The impact on Transocean's business should be obvious: When its customers are spending aggressively it does well; when spending is low it doesn't. With oil plunging in 2020 thanks to the economic shutdowns used to slow the spread of the coronavirus, the energy industry pulled back hard and Transocean's stock fell as investors anticipated a period of poor operating performance.
However, that's really the full-year story for 2020. The individual months over that 12-month span all have their own stories. In December oil prices moved generally higher thanks partly to upbeat coronavirus vaccine news. So there was a general upward bias backing Transocean's stock during the month because investors tend to buy it when oil prices are rising. That was buttressed by a ruling that actions the company took earlier in the year to strengthen its financial position didn't breach financial covenants, lifting a headwind and clarifying Transocean's financial situation. Put all this together and it's not surprising that investors were upbeat in December.
One month doesn't make a trend, as the difference between December and all of 2020 shows. Transocean operates in a highly volatile industry that continues to face material headwinds. Although the 25% December gain was nice to see, investors should probably go into 2021 expecting more dramatic moves both up and down as the world -- and specifically the energy sector -- works to recover from the coronavirus hit.