Citi Sees 'Pair Trade Nirvana' In U.S. Oil Services Group

In a new report, Citi Research analyst Scott Gruber looked at oil services stocks and suggested a couple of pair trades for traders that want to protect against further downside in oil prices.

Gruber believes that the fundamentals of offshore drillers will likely not be improving anytime soon, but he does believe that certain companies are better positioned than others for an eventual recovery.

Waiting Game

Gruber believes that, for offshore drillers, recovery in business is not as simple as watching for a spike in oil prices. He believes that even if Brent prices reach $70/bbl, oil majors are unlikely to raise capex for the time being.

“The volume of idle rigs plus pending newbuilds should delay the call to reactivate mothballed rigs, thereby deferring a key catalyst to rate reflation,” he added.

Related Link: Halliburton, Other Oil Services Firms Suffer Vs. Year Ago As Oil Slides

Risk To Upside

Despite the bleak fundamental outlook for offshore drillers, Gruber sees more risk to the upside than to the downside from current levels. However, he believes that shale service providers are likely to see a quicker recovery than offshore drillers will.

Pair Trades

For traders that are worried about another leg down in oil services stocks, Gruber suggests two pair trades that will help traders profit off the relative outperformance of Citi’s top names:

• 1. Long: ENSCO PLC ESV

Short: Transocean LTD RIG

• 2. Long: Rowan Companies PLC RDC

Short: Diamond Offshore Drilling Inc DO

In addition to the two pair trade suggestions, Citi initiated coverage of Noble Corp plc NE and Pacific Drilling SA PACD at Neutral.