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Paying close attention to an oil & gas opportunity

An oil & gas stock shows signs of breaking out – but would-be buyers must be careful, says Michael Taylor
Paying close attention to an oil & gas opportunity

Last month I wrote about the cost of living crisis starting to bite. It continues. This week, Revolution Beauty (REVB) announced a profit warning and the stock opened down more than 50 per cent. This seems to be happening on a weekly basis; stocks are going from a potential warning (the old ‘broadly in line’) to an actual warning, and then the share price craters.

It’s impossible to say where the bottom is. The S&P 500 had its best month since November 2020 (when the Covid-19 vaccines were first shown to be effective), but sharp rallies are typical of bear markets. I don’t believe we have seen the worst of the market and believe caution is required. Why? Well, to pick one statistic, the price of one-year forward baseload electricity contracts in Germany has gone past €400 (£334) per MWh for the first time ever.

To put this into context, this is almost 900 per cent higher than the 2010-20 average of €41.1 per MWh. 

But Germany isn’t the only country suffering with energy. The UK is set to see average household energy bills rise to £500 a month in January as the price cap lifts again in October at a time when energy usage typically increases. People are typically bad at thinking about the future. It’s why The Simpsons episode when Homer Simpson buys a car is so funny. If you’ve never seen it, Homer is doubtful whether to buy a car on finance, but this doubt is relieved once he is assured that the "crippling balloon payment" is far off in the future. Right now, people are spending and having a good time. It’s the school holidays, and nobody is using much energy anyway. But come October that will change. 

Depending on the unrest, we may see Western leaders pile pressure on Ukraine to sign peace terms with Russia. Lots of people are supportive of Ukraine. But it’s easy to be supportive when all you have to do is proclaim your support on social media and make a donation. How many people will still be supportive when it’s too painful to heat the home and inflation tears apart salaries? Our war will literally be a cold one. And Putin, so far, is winning.

The Nord Stream 1 pipeline that brings gas to Europe is currently running at 20 per cent capacity. We know that Putin is going to throttle this, and so governments are doing their best to supply new sources of energy. That isn’t going to happen overnight. Elevated energy prices are here to stay.

We’re also seeing higher prices in the US and Canada, and so a company I’m watching is i3 Energy (I3E). This is an oil and gas company with a diversified low-cost and growing production base in the western Canadian sedimentary basin. I’m told this is one of the most prolific hydrocarbon basins in the region, although this isn’t of much interest to me.

What is of interest is the chart. The company was a reverse takeover and was listed in 2017. It achieved some success for its investors, with the price reaching as high as 120p. However, the stock printed in the 3-4p range in early 2020. Chart 1 shows the journey and reiterates my belief that shares (especially speculative ones) are for trading only.

 

 

 

Over the past two years, the performance of the company has turned around. In the first quarter of 2022 the company achieved production of 18,095 barrels of oil equivalent per day. It also pays and aims to pay an increasingly higher dividend.

Chart 2 shows the stock’s rising uptrend. The first sign was that the stock had doubled from its lows. That means that demand has now overwhelmed supply and that the appetite for the stock is increasing. A stock doubling from its lows is never a guarantee of a change in the trend, but it’s a strong sign.

The next sign was that the 200 exponential moving average (EMA) was turning upwards. When the EMAs are all pointing upwards it can be a sign that the stock is ready to move north.

I missed all of this move, but I’m now eyeing up the recent high at 31p. I’ve marked an arrow where I’d like to buy if the stock breaks out. However, the volatility in this stock requires caution. It traded below 22p earlier this summer; and so this is a reasonably large drawdown.

What I would like to see is the stock gently trend up towards the breakout point and then consolidate. Periods of low volume and low volatility provide explosive conditions for breakouts and I don’t want to see the stock rally hard up to the breakout point. When this happens, I’m wary of traders in below me looking to sell at the resistance for a move-to-move trade. Rather, it’s better for the stock to be calm and then move.

Another advantage of this stock is that it is traded on SETS, the London Stock Exchange's electronic trading service. This means that you can place orders onto the book to buy and sell at more competitive prices. You’ll need a broker with direct market access (DMA) in order to do this. If your broker doesn’t have DMA capability then it’s likely it’ll be a manual stop – when the level is triggered a broker manually tries to execute the order. This is why there have been many complaints in times of big volume that stops have not been triggered for several minutes or even at all. It’s because the orders are not DMA.

Remember, when setting a stop-loss with DMA orders, you need to use a stop-market order. This means that if you set a stop-loss at 25p and the price is 30p, the stop part of the order will be activated at 25p and then the market order is triggered, selling the stock at market.

 

 

  • Michael has started his Buy the Breakout newsletter which contains trading ideas and tips he has learned whilst trading. You can subscribe for free at his website here: www.shiftingshares.com
  • Twitter: @shiftingshares

 

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