I have my favourite basket of high growth junior and intermediate energy stocks – which are mostly oil but I now have small, starter positions in several natural gas weighted ones too.

This is a traders market.  The charts are telling us if an investor can get 30% of their money on a trade in a few weeks, take it.  Junior energy stocks are having that kind of swing over a several week period.

I am being very cautious in adding to any new oil positions – I am only buying – in very small amounts – if the stock is down at its 200 day moving average and finding real support there.   A lot of the juniors had such good runs in the last year that they need to consolidate over several weeks to get into the oversold position on the weekly charts, which is where I like to buy them in a range bound market.

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And I start to watch a stock really closely as the moving averages converge during a consolidation period, which often means a good sized move is about to happen.  I just don’t know which way.

Below is a 3 year chart on the Toronto Stock Exchange Energy Index – it is showing a big basing period over the last year, where the moving averages have converged for a long time - and usually the bigger the base, the bigger the move.

The junior oil and gas valuations have come down to earth a bit in the last few months – but just a bit.  The BMO Nesbitt Burns Oil & Gas Weekly of June 28 shows the Price-to-Cash-Flow ratio for the juniors is 7.2x, vs. 8.1 on January 15 2010.  The US-listed intermediate producers have seen their Price-to-Cash-Flow drop from 6.5 to 6.0 over the same period, and the International Producers have dropped from 5.5x to 4.6x.  That’s roughly a 10% drop for the domestic producers, and almost a 20% drop for the international producers.

Another Canadian securities firm, Canaccord Genuity, actually had the price-to-cash-flow ratio go UP for their junior and intermediate coverage universe between mid March and the end of June.

Another way to value these companies – and the one that I use a lot – is price-per-flowing-barrel of production.  You divide the production of oil and gas, in terms of barrels-per-day of production (boe/d) into the company’s Enterprise Value, which is simply the market cap plus net debt (or minus net cash).

BMO’s numbers showed the intermediate producers valued almost the same over the January-June time frame at roughly $67,000 per flowing barrel, but the juniors took a big drop from $91,759 to $68,339 per flowing barrel.  The international producers dropped in valuation from $62,566 to $56,395.

I’ve got my starter position in gas stocks – all with high “wet” gas ratios – and I am not buying anymore for now.  I want to see the weekly injection of natural gas going into storage decline below the 5 year average in a meaningful way. 

The situation is especially worrisome for Canadian dry gas producers, and in one of my next stories, I will explain why.

So for now, caution is my buzzword with the only buying happening at historically proven and recently tested support points on the stock chart.

Related posts:

1. Reece Energy: Another Junior Gone; Take the Money!
2. Where The Money Is Being Made in the Junior Oil Market – And Why
3. My Favourite Junior Oil Stocks Exposed – the David Pescod Interview
4. Natural Gas Companies Can Make Money at $5/mcf Gas – Thanks to Horizontal Drilling
5. It’s a “Stock Picker’s Market” in Junior Oil and Gas