5 oil & gas stocks with superior relative strength

Monday, Oct 22 2012 by
5 oil  gas stocks with superior relative strength

Using quant screening tools to assess potential stock investments in the oil & gas sector is in many respects as useful as drilling a well without looking at seismic data. The financials might tell some of the story but resource companies carry a great deal of information that’s not always easy to compare on a stock-for-stock basis. Items like asset values, resources and reserves, geography, tax, farm-outs and royalty issues add to the complexity. It’s not impossible to screen them – but it’s a complicated affair. 

That’s not to say that there is anything lost in comparing oil & gas stocks on some metrics – if only to spark some ideas about where investor money is flowing and why. Share price momentum is among the most obvious tools in the box for tracking stocks that are in and out of favour, often because it is an indicator that is influenced by positive news flow. Not only that, but paring down the sector to find shares that are outperforming the general market – an indicator known as relative strength – could also point the way to those that are likely to keep rising. 

Why relative strength works 

Stocks that are displaying relatively strong price appreciation (or depreciation in the case of shorting) are magnets for momentum investors. And when that relative strength begins to weaken, the time to move on is likely to be fast approaching. The general consensus in support of momentum claims the phenomenon can be blamed on several factors, the most prominent of which is a type of behaviour known as the “disposition effect”. This relates to how both private and institutional investors react to news about a stock; the main point being that they tend to sell too quickly on good news to lock-in profits while selling too slowly on bad news in the hope of eventually breaking even. 

In a seminal piece of research back in 1993, researchers Jegadeesh and Titman not only claimed that relative strength worked, they proved it with a strategy that was surprisingly straightforward. Their findings showed that selecting stocks based on their past 6-month returns and holding them for 6 months, realised a compounded excess return of 12.01% per year on average between 1965 and 1989. 

Another explanatory factor behind momentum is a phenomenon called ‘post earnings announcement drift’ (Bernard and Thomas, 1990). This has been found to occur in the weeks and months following a company news story whereby the price drifts higher on good news, particularly when it is a surprise, rather than the market immediately pricing-in the full implication of the latest update. 

We have screened the market for the strongest stocks on a 6 month relative strength basis to see which could be worthy of closer inspection. 

1. The US 

Over six months, the best relative strength seen in the oil & gas sector has been in AIM small-cap Magnolia Petroleum (LON:MAGP). With a target to close 2012 with interests in at least 100 wells, there has been no shortage of news from Magnolia this year. The company is focused on co-venturing on wells targeting the Bakken and Three Forks Sanish plays in North Dakota, US, and the Mississippi Lime, Woodford / Hunton formations in Oklahoma. It is also planning to start drilling its owns wells in Oklahoma. The shares have risen from 1.24p to over 4p in six months and brokers Hardman continue to rate the stock a strong buy. 

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2. Latin America 

Elsewhere, Amerisur Resources (LON:AMER), which has operations in South America, saw its shares take off in late May as the first well in a six-well programme at its Platanillo field came good. Amerisur’s efforts to boost reserves at the Colombian field have been rewarded by two more well successes to date, which has doubled its share price to 43p in five months. The company capitalised on that gain with a $40m fundraising earlier this month, which is funding its bid commitments in the latest Colombian licensing round as well as more drilling work. Two more wells are scheduled to be drilled on Platanillo before the year is out. 

3. The Falkland Islands 

For Falkland Islands oil and gas analysts, Argos Resources (LON:ARG) has been the share showing the best strength among its peers in the region – rising 10p to 25p in the past three months. Argos is currently mid-way through a farm-out process for its North Falkland Basin licence but the company is upbeat on what its seismic data indicates. In particular, structures that look similar to the successful Sea Lion discovery made by Rockhopper Exploration in the same basin, have raised pulses. Meanwhile the arrival of Premier Oil to partner with Rockhopper and their plans for further exploration have all been welcomed by Argos. 

4. Ireland 

At number eight on the list is Lansdowne Oil & Gas (LON:LOGP), a company whose shares doubled to over 60p during the summer on better than expected news from drilling work offshore Ireland. Lansdowne’s partner, Providence Resources (LON:PVR), hit the headlines with an oil find at Barryroe that was much larger than previously thought. Industry majors are apparently now being sounded out on helping to develop the field. For its part, Providence has been the strongest performing stock over one year (it is in 16th place on a six-month time frame). 

5. The big one 

Finally, the largest stock in the top 10 relative strength list over six months is Heritage Oil (LON:HOIL) which has been actively shifting its asset focus during 2012. In July the company agreed a deal that took it into Nigeria – a country where CEO Tony Buckingham has some experience. That was followed in August with the sale of a stake in its Miran block in Kurdistan to Genel in a cash and loan deal worth $450m. Overall, the shares have increased by more than 70p to around 194p in just over three months. 

Stock ideas 

The common factor linking the strongest performing oil & gas stocks on a relative strength basis is positive news flow. Whether it’s successful drilling programmes, changes in strategy or, as with Argos Resources, a perception that events are stacking up in the stock’s favour. In that sense, tracking relative strength at least provides an idea of where the action is in the market. Of course, for oil & gas investors, the armoury of metrics and indicators is far broader – as is the risk range. Choosing between a stock that is building its reserves base versus one that is building profits is an individual choice that requires much deeper scrutiny of strategy. Either way, relative strength offers at least some glimpse of the stocks that are on the rise and could have further to go.

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Magnolia Petroleum plc is an oil and gas exploration and production company focused on the acquisition, exploitation and development of oil and gas properties primarily located onshore in the United States. The Company’s portfolio includes interests in approximately 169 producing and nonproducing assets, primarily located in the highly productive Bakken/Three Forks Sanish hydrocarbon formations in North Dakota as well as the Mississippi Lime and the Woodford and Hunton formations in Oklahoma. Magnolia Petroleum Inc is a subsidiary of the Company. more »

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Amerisur Resources is a United Kingdom-based independent oil and gas production and exploration company focused on South America, with assets in Colombia and Paraguay. The Company operates and holds a 100% working interest in the Platanillo block in Colombia. The 11,048 hectare block is located in the Putumayo Basin, in the south of Colombia. It operates and holds 60% working interest in Putumayo-12, a 54,444 Hectare block which is adjacent to Platanillo. The Company also holds 100% of the Fenix block, a 24,117 hectare area in the Middle Magdalena Basin of Colombia. It holds 100% ownership of five blocks, holding two exploration and production and three prospecting permits extending over 6.4mm hectares. more »

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Argos Resources Ltd is an oil and gas exploration company based in the Falkland Islands. The Company’s principal asset is a 100% interest in production license PL001, covering an area of approximately 1,126 square kilometers in the North Falkland Basin. The license boundary lies near the Sea Lion oil field. The recoverable resources in Sea Lion are reported to be around 458 million barrels of oil. The Helios prospect identified in the North Falkland Basin is a lacustrine fan and composite channel sand sequence of Aptian age. The Rhea prospect is a lacustrine fan and composite channel sand sequence in a combination structural or stratigraphic trap. It participated in drilling two exploration wells both of which recorded oil shows. The Company has discovered around 52 prospects mapped with a resource of 3.1 billion barrels of oil and an upside of 10.4 billion barrels. It has also identified several prospects similar to the adjacent Sea Lion oil discovery and around 40 further leads. more »

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  Is Magnolia Petroleum fundamentally strong or weak? Find out More »

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About Ben Hobson

Ben Hobson


Strategies Editor at Stockopedia. Writer, Editor & Investment Strategies Analysis. Test driving and telling the world about the awesome stock market investing tools and resources at Stockopedia. Helping Stockopedia subscribers take control, invest with confidence, beat the market and sleep soundly at night. more »

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