By Smoking Gun
Quote of the day
"An Idle Mind is the Devil's Playground" - Benjamin Franklin
Last Friday's release of the US jobs data was just what equity markets needed after a week of wild swings. What can be best described as Goldilocksian numbers that showed that a higher number of jobs than expected were added, coupled with an overall increase in unemployment rate. The numbers assuaged fears of a premature tapering of the QEs while also tempering fears of another dip in the economy all at once. This sets the stage for a good trading week for global markets and I will look into one stock in particular which I have been monitoring on my P8118.com system, Interra Resources.
Fresh off the frantic run-up and subsequent announcement of a buyout deal (albeit a huge anti-climax) concerning Edward Soeryadjaya controlled Ramba Energy, a similar build-up in interest is brewing at younger brother's Edwin's Interra Resources. It may be that the sudden interest in Interra Resources was a spillover from Ramba's trading halt which may have diverted trading interest in the former, as both companies similarly are in the Oil & Gas Mining and Exploration space even though the two companies have no links as the brothers are not known to be on the best of terms.
The Edge published an article on Ramba on Friday which would shed some light on the recent trading activity.
From the Edge 7/6/2013
INTERRA RESOURCES, which could trace its SGX listing through the reverse takeover of Van der Horst in 2003, was once a low-profile energy play. But with the current interest in companies with exposure to Myanmar, Interra Resources, which is thus far not formally covered by any analyst, is now drawing some serious investor attention. Last November, CIMB analyst William Tng put out a similar non-rated research report on the stock, suggesting that it is worth 44.1 cents.
Since the CIMB report, the company’s share price has increased by more than a third to close at 51.5 cents on June 7, extending a run since January 2012 when the stock was languishing at less than 8 cents. Interra Resources, profitable for five straight years, is totally different from the days when it was a struggling producer of oil in a pariah country.
If certain analysts are right, the company’s share price has more room to grow. On June 5, DBS Vickers put out a non-rated report by Ling Lee Keng and Suvro Sarkar that gives a potential target price of 57 cents. The company now has two producing fields in Myanmar, where it holds a 60% stake for both fields. It is also pumping in two other wholly-owned fields in Indonesia. It has a total of so-called “proven plus probable” reserves of 24.6 million barrels.
Last year, Interra Resource’s share of production from the fields was 369,908 barrels — up 23% compared to the previous year. Earnings for FY12 was US$3 million — up from just US$1 million the year earlier. Revenue, in the same period was US$30 million and US$25 million respectively. DBS Vickers’ Ling and Sarkar expect the company’s earnings this year and next year to hit US$4 million and US$5 million respectively, on a corresponding revenue of US$30 million and US$31 million.
The higher forecasts are backed by the company’s on-going expansion. From 33% last year, Interra Resources today has increased its share of onshore oil exploration in Myanmar to 40%, making it the market leader in the country in this segment.
If certain analysts are right, the company’s share price has more room to grow. On June 5, DBS Vickers put out a non-rated report by Ling Lee Keng and Suvro Sarkar that gives a potential target price of 57 cents. The company now has two producing fields in Myanmar, where it holds a 60% stake for both fields. It is also pumping in two other wholly-owned fields in Indonesia. It has a total of so-called “proven plus probable” reserves of 24.6 million barrels.
Last year, Interra Resource’s share of production from the fields was 369,908 barrels — up 23% compared to the previous year. Earnings for FY12 was US$3 million — up from just US$1 million the year earlier. Revenue, in the same period was US$30 million and US$25 million respectively. DBS Vickers’ Ling and Sarkar expect the company’s earnings this year and next year to hit US$4 million and US$5 million respectively, on a corresponding revenue of US$30 million and US$31 million.
The higher forecasts are backed by the company’s on-going expansion. From 33% last year, Interra Resources today has increased its share of onshore oil exploration in Myanmar to 40%, making it the market leader in the country in this segment.
The company is carrying various expansionary activities like drilling. From seven wells drilled in 2011, Interra Resources has been stepping up the pace, to nine wells last year and this year, it will further increase the number to 21 wells. The company, which has been doing business in Myanmar since 1996, is also seeking out more fields put out for bidding by the government. DBS Vickers analysts expect 18 fields to be put up for bidding around August this year, with the awarding of the licences by end of the year.
Besides Myanmar, Interra Resources has also been expanding. Last year, it bought a 49% interest in an onshore exploration block in central Kalimantan covering some 8,150 sq km. Under terms of the Kuala Pambuang production sharing contract, Interra Resources has up to 10 years to find new oil.
Ling and Sarkar note that a “wild card” might manifest in the form of growing gas production. Gas, commonly found tucked with underground crude, has been found in one of the wells in Myanmar. However, how strong this gas will flow has yet to be fully determined. “Gas is generally cheaper to produce but its selling price is also lower. The upfront investments for gas exploration are higher but once the flow of gas has been established, the incremental cost is less than for oil production,” they note. If gas production is to happen, the company can tap on existing lines to pipe gas from Myanmar to China.
Of course, there are risks. Firstly, there might be uncertainty over the company’s concession terms over the longer term. “There is no guarantee of contract renewal or extension upon expiry, failure of which may result in substantial losses and significant reduction in investment value,” state Ling and Sarkar. Next, the company’s revenue is reliant on global crude oil prices. Finally, the company needs substantial capital to fund future development activities. “Failure to obtain additional funding may cause the Group to forfeit its interests in certain concessions or to discontinue some of its exploration,” the analysts write.
Besides Myanmar, Interra Resources has also been expanding. Last year, it bought a 49% interest in an onshore exploration block in central Kalimantan covering some 8,150 sq km. Under terms of the Kuala Pambuang production sharing contract, Interra Resources has up to 10 years to find new oil.
Ling and Sarkar note that a “wild card” might manifest in the form of growing gas production. Gas, commonly found tucked with underground crude, has been found in one of the wells in Myanmar. However, how strong this gas will flow has yet to be fully determined. “Gas is generally cheaper to produce but its selling price is also lower. The upfront investments for gas exploration are higher but once the flow of gas has been established, the incremental cost is less than for oil production,” they note. If gas production is to happen, the company can tap on existing lines to pipe gas from Myanmar to China.
Of course, there are risks. Firstly, there might be uncertainty over the company’s concession terms over the longer term. “There is no guarantee of contract renewal or extension upon expiry, failure of which may result in substantial losses and significant reduction in investment value,” state Ling and Sarkar. Next, the company’s revenue is reliant on global crude oil prices. Finally, the company needs substantial capital to fund future development activities. “Failure to obtain additional funding may cause the Group to forfeit its interests in certain concessions or to discontinue some of its exploration,” the analysts write.
On this post, I am looking at the stock purely from a trader's perspective as I had picked up some highly abnormal trading patterns in Interra Resources during the start of the week using the P8118.com system. The readings were still very positive at the close of Friday's trading session. I had spotted Ramba at the early 50c levels using the P8118.com system last week which turned out quite well,sprinting all the way up to 78c until the trading halt. The subsequent announcement turned out to be a big sell. (Looks like a rushed announcement by Ramba, probably cornered into submission by the SGX query on their recent run-up in share price)
At last Friday's close (7/6/13), the readings on the M Index were neutral at 64.67, down from the abnormal trading volumes registered on the 4th and 2nd day prior to Friday's trades (399.82 and 250.04 respectively). For those that are not familiar with the P8118.com system, the M Index measures the abnormality of trading interests in a stock i.e. 100 being the normal trading volume, and readings of 200, 300 and .....being 2X, 3X (and so forth) normal trading activity. It is normally the first indicator I look at, as this index will filter out those which are have higher than normal traded activity. It must also be up, meaning that the increased activity is bidding up prices, meaning that buying interests must know something the market doesn't, something akin to insiders mopping up shares in anticipation of a move. This was evident during 4 days ago, when the M Index spiked up to 399.82 from 16.43 the previous day.
Despite trading activity regressing back to its normal trading volumes, what I like about the stock that the Money Flow Index (MFI) is still on an increasing trend. This means that the smart money is still in the stock. One further plus point is that the stock is close to its 52 week high as displayed on the last column BrH%, which shows that the stock has backed off marginally from the previous days' highs but still remain at 91.96% of the 52 week high. We like to look at stocks which are trending clearly towards the 52 week high, in most cases stocks at 90% of the BrH% tend to try to break those highs and reach higher highs.
If you are already in the stock, you will be comforted by the fact that the Money Flow Index is stable and on an increasing trend, no major problems there. BrH% also looks ok. You would only be worried if there is a drop of 3% of the MFI from current levels otherwise the stock is still ok. If you are not in it yet, you should look at signs of activity in the M Index to time your entry. Any readings of end of day M of 250 and above would be good indicator for entry (given that the M reading is accompanied by a price increase). Please note that M Index is a cumulative figure and starts from 0 at the start of the trading session and peaks at the close. So for trading purposes, one would have to estimate the M value based on the trades during any given point of the day, say if during the first hour of trade, the stock trade at M of 60, one can assume that if the trading were to reflect early trading interest, the M should be around the range of 150-200 by the end of day.
For trading purposes, I do not like to look at target price levels as I think the exit levels should be based on the MFI levels. The basis for this is that the smart money knows when to go in, and they would probably know what levels to go out as well. So normally, I would look for weaknesses of 2-3% on the MFIs to get out as it would be a good sign that the smart money has exited. As long as the MFI is increasing or stable, one should let the profits ride.
Personally I find the P8118.com system suitable for fast paced trading as compared to charting per se as it would give me a quick filter on prospective trading opportunities which charting tools can't fish out immediately. The concepts are easy to grasp and the learning process is very short and simple as compared to other methods like technical analysis and value investing methods. Currently, its open for registration and they giving away free trial accounts. What is more beneficial is that they are also giving unlimited free classes to all paid and trial users to enable them to understand and use the system for their trades. For more about the P8118.com system, you can visit them at www.P8118.com.sg.
Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
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