Trading Room – Wed 31 Oct 2018
Oil prices has fallen lately, depressed by concerns that the U.S.-China trade dispute will dent economic growth and by signs of rising global supply despite upcoming sanctions against Iran.
Oil has also been caught in the global financial market slump this month, with equities under pressure from the trade war between the world’s two largest economies.
Benchmark Brent crude oil is trading around US$76.64 per barrel while U.S. light crude is trading at around US$66.54.
Both contracts have recovered ground over the last week but are around US$10 a barrel below four-year highs reached in the first week of October.
Against this background, how should one trade one of the most liquid oil and gas stock, Hibiscus Petroleum Berhad?
The company is Malaysia’s first listed independent oil and gas exploration and production company and was listed in 2011 as the first Special Purpose Acquisition Company (SPAC) in South-East Asia.
Following the completion of the acquisition of a 35% stake in Lime Petroleum Plc in April 2012, Hibiscus Petroleum became a full-ﬂedged oil and gas exploration and production company.
It was recently reported that Hibiscus Petroleum is aiming to double its oil output in the United Kingdom and Malaysia to 20,000 barrels per day (bpd) by 2021.
The company’s fortune and trading interest on the stock is thus likely dependent upon the demand and price of crude oil.
What could be an elite trader’s trading plan towards the stock?
The stock has a recent beta of 1.44, which means it is more volatile than the market and hence would be a good target to trade by aggressive traders.
Likewise, we also like the stock for trading given that it’s a consensus stock which is tracked by analysts and also institutional funds and has a high volume and liquidity.
The stock has a five-day simple average of around 79.0m shares traded daily.
Based on data from Bloomberg, the stock is tracked by at least 3 analysts and are quite well liked with an average fair value fundamental target price of RM1.39.
That means the stock is deemed fundamentally undervalued analysts against the stock current price of RM1.02.
Based on exit signals flagged by the Master Algorithm and our read of the crude oil prices earlier this month, we had exited the stock previously at around RM1.30 after entering earlier around the RM1.00 level and made substantial profits (see mPower Algorithm report dated 3rd of October).
Long buyers who bought the stock then based on the above trading setup information would have benefited greatly as would have the elite trader members of our mPower Algorithm and mPower Trading programs, who have first-hand access to our report.
With its steep price fall, its natural that we are interested to trade Hibiscus again. The stock has very good liquidity and tends to move in predictive trading cycles.
Is it a good time to buy back the stock now at a much cheaper price now, considering that it is deemed even more “undervalued” by analysts based on the wide discount from its fair value assigned or should you carefully avoid the stock given the current oil price trend?
We are always wary that regardless of our past gains, past performance is not predictive of future moves on the stock but there is a key consideration that is swaying our trading plan on the stock now.
Only when this consideration is satisfied and the trading trigger in place would permit elite traders to consider a move on the stock. The stock has good target levels in our view and is thus attractive given the projected reward to risk ratio but only at the key level mentioned.
Watch carefully the stock key price level and the setups as highlighted by us in the mPower Algorithm report today.