Wednesday, September 4, 2013

PSE: Oil patch bull play

Update 11/12/2013: I rolled out of PSE on Sept. 27 to avoid the uncertainties surrounding the government shutdown and threat of a default. By my rules, when I was ready to re-enter, it required a fresh break above the 20-day price channel to trigger that re-entry.

The breakout never occurred, and on Nov. 7 PSE broke below the 20-day price channel and confirmed the break down the next day. That means PSE is no longer a candidate to be rolled forward into another bull position, and I'm removing it from my Rolls list and calculating results.

I held PSE from Sept. 4 to Sept. 27 as long shares. They gained 3.9% over the 23-day lifespan of the position, or 62.3% annualized. 

By rolling out, I missed out on a $9 three-day rise, so the Republican antics over funding government cost me those potential profits. However, PSE fell back just as quickly, and under my rules I would have closed for a net loss. So, in that respect, the shutdown and default threat worked to my benefit.

Pioneer Southwest Energy Partners L.P. (PSE) began its current uptrend from $21.58 on March 6, 2013 and has carried it to an all-time high today of (so far) $42.69.

The geology of PSE's chart is far removed from the steady accretion of soil and rock that eventually builds an upland.
PSE 180 days 4-hour bars

The chart reads more like an earthquake monitor, tracking tectonic shifts that in an instant build mountains that continue to rise slowly from the heights in anticipation of the next violent move.

PSE broke above its 20-day price channel on Tuesday and continued higher today, confirming the bull signal.

The first major gap on the chart was 18.3% from May 7 to May 8 of the present year, following by a few days a negative 3.6% earnings surprise. Go figure.

The second was a 4.6% gap from July 31 to Aug. 1, following a 10.7% positive earnings surprise.

PSE's following clearly is motivated by a mixture of hope and actual results, a potentially powerful brew to fuel further rises, but as always, nothing is guaranteed.

This is PSE's third bull signal since the present uptrend began last March. The two prior breakouts were profitable, yielding 17.8% over 39 days on average.

PSE was one of five symbols that survived my initial screening last night. (See "Wednesday's Prospects".)

The one bear signal, IPXL, rose back within in its 20-day price channel and so failed confirmation.

ERIC and BCE both reversed course from bearishness to a bullish breakout on news within the telcom industry. Under my rules I can pass on breakouts prompted by news, on the theory that the smart trader buys on the sound of cannons and sells on the sound of trumpets. The news reports are trumpets. The good news has already been priced in.

SSW was a contender, but I took a quick look at its financials, and it has return on equity that is significantly lower than PSE's and a quite high level of debt. Also, BCE is less liquid, always a consideration.

Pioneer Southwest Energy, headquartered in Irving, Texas, owns gas and oil assets in Texas and New Mexico. The company owns an average 90% interest in about 1,200 wells.

Fewer than a handful of analysts follow Pioneer Southwest, and they collectively come down at a negative 50% enthusiasm rating, something less than a resounding vote of confidence.

The company reports return on equity of 27% with debt running to 65% of equity.

Looking at the past 12 quarters, the company has been profitable in each. Profits began to fall in the 1st quarter of 2012 but were up significantly in the 2nd quarters of this year.

Earnings have surprised to the upside five times, including the most recent quarter, and to the downside seven times, including the quarter prior to the most recent one.

Add to all of that the fact that Pioneer Southwest is an energy company, and it operates in a volatile sector, perhaps now more than usual, given the uncertainties in global markets amid the civil war in Syria and prospects of great power intervention.

Institutional ownership is quite low, at 23%. The price, however, has been bid up to an extraordinary level. It takes $8 in shares to control a dollar in sales.

PSE on average trades 149,000 shares a day, sufficient to support a limited number of option strike prices, spaced $5 apart.

Although the at-the-money strikes have triple-digit open interest, the next strikes out are too illiquid to meet my standards, so it is impossible for me to construct a hedged vertical spread position.

Front-month, at-the-money call options have a 30.9% bid/ask spread, an extremely wide spread that is another reason not to structure any trade as options.

Implied volatility stands at 31%. It has been falling in a series of stair steps since late June.

Options are pricing in confidence that 68.2% of trades will fall between $38.84 and $46.40 over the next month, for a potential gain or loss of 8.9%, and between $40.81 and $44.43 over the next week.

Trading in options today is on the lackadaisical side, with call volume running at 26% of the five-day average, and puts at 27% of average.

The fair-price zone on today's 30-minute chart runs from $41.79 and $42.44, encompassing 68.2% of transactions surrounding the most-traded price, $41.95. The price opened near the most-traded price and has since risen to above the zone.

Pioneer Southwest Energy next publishes earnings on Oct. 28. The stock goes ex-dividend in October for a quarterly payout yielding 4.88% annualized at today's prices.

Decision for my account: I've opened a bull position in PSE, structuring it as long shares. Good chart, good odds, good financials. The Syria risks are worth noting, but risk is what trading is all about.


My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

At several points in my analysis I use the number 68.2%. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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