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Trader Talk is produced by a team of active traders, analysts and various derivatives professionals from multiple organisations. Trader Talk provides comment on equities, commodities, and other financial instruments based on both technical and fundamental analysis.
Rockhopper finds more than expected
A glance at the above chart of the FTSE 100 shows it has been a another volatile week as investors digest last weeks strong gains and re-focus on troubles in the Eurozone.
A batch of poor economic data provided a reminder of the tough macro-economic climate as Germany, Europe’s powerhouse, reported that its gross domestic product grew only 0.1% in the second quarter of 2011 versus forecasts of 0.5%.
The French economy, which last week suffered from rumours that it was at risk of losing its prized triple-A credit rating, stagnated to a zero percent growth rate, confirming fears that the core European economies are weakening.
UK unemployment claims also increased the most in two years in July, suggesting the labour market is deteriorating as the Eurozone debt crisis hampers growth and government spending cuts bite.
Surprisingly strong US industrial production however, provided some encouragement after rising by 0.5% in July, its fastest pace in seven months. Industrial output also increased 0.9%, well above economist’s expectations for a 0.5% rise, easing fears that the worlds largest economy is sliding back into recession.
An update from credit ratings agency Fitch also reassured investors, affirming its triple-A rating on the US and stating its near-term outlook was “stable”. The update is a remarkable contrast to S&P’s downgrade, as the agency downplayed any political concerns in Washington.
There was widespread disappointment in the markets over the outcome of Tuesday’s highly anticipated summit between Angela Merkel, the German chancellor and Nicolas Sarkozy, the French president. Investors were hoping for further support for the Eurozone and an update on market speculation surrounding the issuance of a Eurobond. But the leaders failed to placate concerns and rekindled plans for a financial transactions tax, putting the troubled banks under further pressure.
Minutes from the Bank of England’s August meeting showed two policymakers had backed down from their calls to raise interest rates with all nine decision makers voting to keep rates on hold. The dovish move also revealed the committee considered a new round of stimulus given the deteriorating economic outlook, acknowledging that Eurozone problems provided the biggest threat to the domestic economy.
Technical analysis highlights the recent volatility, with the near 600 point rally last week being followed by a few days of calm before losing over 400 points on Thursday and Friday. The index bounced off historical support at 4800 and ran out of steam at 5400 resistance, with swings within this range likely to continue for the time being.
In conclusion, sentiment is likely to remain fragile for some time yet, given the heightened uncertainty over the global economic outlook. As a result, equities are expected to remain volatile, with investors responding to each data release looking for signs of future direction. I favour a retracement back towards 4800 before buyers return in force and try to push the index back over resistance at 5400.
Rockhopper exploration (LON:RKH), a Falkland Islands oil explorer, this week announced an exploration update, increasing its estimate for how much oil it could find and extract at its Sea Lion complex.
Anticipation of a big oil find off the coast of the Falkland Islands has been speculated since the early 1990’s. In 1998 Shell drilled six test wells, but it wasn’t clear whether there was enough oil to make extraction viable.
Improved technology and the rising price of oil have intensified the search for oil over recent years. The Falkland Islands is broken down into two basins; the North basin, which is the shallower more promising area and the South basin, which spans a larger geographical area, but deeper more choppy waters make it harder to access.
Each basin has two main exploration companies – Rockhopper and Desire in the North and Falkland Oil & Gas and Borders & Southern in the South. Since last year, when the Ocean Guardian rig was taken down to the area and commissioned by each company to drill a series of test wells, Rockhopper has been the only one to have found oil.
On Monday, Rockhopper announced that new seismic data indicated its Sea Lion discovery in the North Falkland basin could extend further than expected. Chief executive, Sam Moody said “we are highly encouraged by the interpretation of new seismic data which identifies both significant reservoir extension and the existence of two additional fan prospects above and beneath the Sea Lion Main Complex.”
As a result, the company raised its lowest case estimate of oil to 608 million barrels from 516 million and on a conservative recovery factor of 30%, 325 million barrels of oil could be produced, over 60% more than previously thought. Yet the share price has been suppressed by general weakness in equities and the market has failed to reflect the scale of this discovery.
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After spending previous year around 50p, the initial finding last year sent the shares over 1000% higher to 520p. Since then they have drifted back towards recent support at 202p and despite the strong news flow this week, the shares have failed to react.
I believe the shares are a buy ahead of a Capital Markets day next month, when the company will promote itself and outline plans for the development of the groups Sea Lion discovery, as it tries to raise its status among institutional investors.
At the time of writing the share price is 207.5p and near term targets are seen at 228p, 243.75p and 276.5p, with a stop loss at 191.8p.
This report was written by Mark Allen – Head of derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Rockhopper, but client accounts may. The material in this report has come from Simply Charts and Rockhopper’s corporate website.
