Seadrill faces ‘the mother of all short squeezes’

Shares in offshore driller Seadrill soared more than 50 percent on Monday, marking the stock's eighth straight day of gains on the back of what one analyst called the "mother of all short squeezes."

The Oslo-listed company has seen demand to "short" its stock drop significantly over recent weeks, according to financial information services firm Markit, as spiking stock prices pressured investors to drop bets that shares would tank.

About 9.2 percent of Seadrill shares, which are also listed in the U.S., are currently on loan but demand to borrow those shares dropped to 37.5 percent on Friday, Markit's data showed. That's against the most recent peak on February 8 when demand hit 78 percent.

Meanwhile, the company's share price has climbed over 140 percent in the last 30 days and 190 percent over the past seven trading days alone.

A Seadrill semi-submersible drilling rig sits under construction in the dry dock at the Hyundai Samho Heavy Industries shipyard in South Korea.
SeongJoon Cho | Bloomberg | Getty Images
A Seadrill semi-submersible drilling rig sits under construction in the dry dock at the Hyundai Samho Heavy Industries shipyard in South Korea.

Some reports suggest news that Seadrill's biggest shareholder, John Fredriksen, might make further investments in the company, and that speculation around the prospect have been driving share prices higher, after he recently freed up $517 million worth of shares in salmon farming company Marine Harvest.

But Harald Hornes Oyen, the head of research at SEB's Oslo branch, told CNBC that the accelerated spike had more to do with speculation over the company's refinancing plans and the short-selling trend across energy stocks.

"There's nothing fundamental driving this rally," Oyen told CNBC by phone.

"So that leaves us with the last explanation, really, which is that this is the mother of all short squeezes," he said, referring to a market phenomenon where a heavily shorted stock moves sharply higher, compelling investors to close their short positions which in turn puts upward pressure on the stock price.

That's amid growing optimism over the success of a prospective refinancing plan that was briefly mentioned during Seadrill's fourth-quarter earnings conference call.

"Those who have shorted the share are beginning to panic and see that the shareholders may succeed," Seadrill chief executive Per Wullf told Reuters Monday.

Seadrill, Oyen explained, has been one of the most shorted stocks in the already heavily short energy sector.

"When you have market caps below 10 percent of the total enterprise value, when you have huge short interests, and when you get some oil price release, mixed up with speculations on restructuring: it's a toxic cocktail for rallies," he said.

However, Oyen expects the share price to settle down soon.

Seadrill's Oslo-listed sharese were up 46 percent as of 13:45 London time Monday, after trading above 50 percent at the start of trade.

"Momentum is already fading on the margins, and we think the fundamentals will soon catch up here."

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