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Technical Analysis of Storm Exploration (SEO-TSX)

 By Brian Hoffman, CA, CPA

Prologue-Keith Schaefer

Natural gas prices continue to bounce on the bottom of their recent price range, yet natural gas stocks charts are looking bullish – which means the market really does believe that the sharply lower rig counts across North America will mean a (sharp?) increase in natural gas prices sometime later in 2009.

Storm Exploration is 92% gas, and is consistently one of the top recommendations of the many research reports I read weekly from Canadian brokerage firms.   Production is focused on the Montney tight gas play in British Columbia and Alberta. It has one of the lowest finding costs for oil and gas in the industry.  Underneath Brian’s technical analysis, I have included the highlights directly from their latest quarterly.

Storm is one of a handful of natural gas producers, with a track record of success (mgmt has built and sold companies before), that  investors should be tracking if they believe natural gas prices will rise this year.

Brian nor I own stock in Storm; he just finds charts he likes and does the technical analysis.  Storm is not a portfolio purchase for Oil and Gas Investments Bulletin.  I enjoy his write-ups and hope readers do as well.

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Storm Exploration (SEO-TSX) 1 year chart

The stock chart for Storm Exploration Inc. (SEO-TSX, $13.58) looks bullish with a recent breakout from a downward price channel marked by the blue dashed lines in the chart below.  Importantly, the breakout achieved a minimum 10 per cent move above the top dashed line and was accompanied by increased volume, which confirmed the breakout.

Storm’s share price faces resistance at about $14.25, which is the price level marked with the green line.  The share price has started to consolidate around the $13 to $13.50 level and should find support at the top of the downward price channel, currently at about $12.

The stock price has started a flag formation marked by the red dashed lines, which is a bullish pattern.  Such patterns are called half-mast formations since the initial move is normally 50 per cent of the total move over a relatively short period of time.  With Storm, the price moved from about $12 to $13.50 for an increase of $1.50, so the share price could potentially move up to $15 from $13.50 in short order.  However, a move to $15.70 is required in order to confirm the breakout (i.e. 10 per cent above the $14.25 resistance level) and $14.25 would then become a support level.

Brian Hoffman, CA, CPA, is an affiliate of the Market Technicians Assoc. and a member of the Canadian Society of Technical Analysts (E-mail: bk.hoffman@rogers.com)

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Highlights for the quarter ended March 31, 2009:

 

  • Production increased to 8,441 barrels of oil equivalent per day, a 30-per-cent increase from production of 6,500 boe per day in the same period one year ago. This is a per share increase of 24 per cent using basic shares outstanding at quarter-end.
  • All four wells drilled in the quarter were successful resulting in four gas wells (2.8 net). This included one vertical and one horizontal well in the company’s Montney discovery at Parkland plus two vertical shale tests (0.8 net) targeting Devonian shales in the Horn River basin. In addition to this, three horizontal Montney wells drilled at Parkland in the fourth quarter of 2008 were completed and tied in.
  • Cash flow for the quarter was $13.7-million or 30 cents per diluted share, a decrease of 30 per cent from 43 cents per diluted share in the prior year first quarter. Not surprisingly, this was the result of lower commodity prices with the year-over-year decline of 39 per cent in per boe sales price more than offsetting 24-per-cent growth in production per share.
  • The first quarter cash flow netback of $18.06 per boe represents a decline of 45 per cent from the cash flow netback of $33.00 per boe in the year earlier period and, again, this was due to the 39-per-cent decline in the per boe sales price over the same period. A 23-per-cent decline in total cash costs from the year earlier period did offset some of the commodity price decline. Total cash costs, which include operating expenses, interest expense, transportation costs, and general and administrative costs, averaged $9.81 per boe in the quarter. Notably, operating costs were $5.87 per boe in the quarter, a decline of 22 per cent from the previous year.
  • Net income for the quarter was $1.3-million or three cents per diluted share, a decrease of 79 per cent from net income of 14 cents per diluted share in the prior year period. Charges for depletion, depreciation and accretion at $14.86 per boe were 14 per cent lower year over year but this improvement was more than offset by the decline in commodity prices over the same period.
  • On March 6, a bought deal equity offering was completed resulting in the issuance of 1.85 million common shares at a price of $10.60 per share. Net proceeds after expenses are estimated to be $18.7-million, which has been used to retire debt and to finance the $8.9-million acquisition of a gross overriding royalty burdening three sections of land in the company’s Montney discovery at Parkland.
  • Capital investment including the acquisition referenced above totalled $31.5-million in the quarter, leaving bank debt and working capital deficiency at $97.0-million or 1.8 times annualized first quarter cash flow. Year over year, total debt increased by 6 per cent while production per share grew by 24 per cent.



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