Petroleum Development Corporation (PETD)
(December 16, 2004)
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Dear readers - please note that we covered our 25% short position on Tuesday morning in our DJIA Timing System at 10,640 and went 100% long at the same price. This was posted in real-time on the "Special Alerts" section of our discussion forum.
Readers have asked why I did not send out a "special bulletin" regarding such a trade. Over the last week or so, I have received a couple of emails expressing dismay over our "overly high" volume of transactions in our DJIA Timing System and of our emails. This is why we have refrained from emailing our subscribers regarding our latest trade. However, we have concluded that we cannot satisfy everybody when it comes to writing a newsletter, and so we do not intend to.
After careful thinking, we believe the best way to communicate to our readers regarding our short-term views of the market is through our DJIA Timing signals (sending this to our readers has also helped our own trading immensely in that it forces us to think carefully before implementing a new signal). Sure, our latest trades have been frequent, but just ask how the world's best fund managers have done this year. The theme this year has all been about short-term trading, and buying oversold and selling overbought situations. We have always tried to stick to a longer-term view with our signals (since we believe that the most money is made with catching the trend and just holding on) but this is easier said than done. For readers who believe that we trade too much in our DJIA Timing System, then please just go ahead and hit the "delete" button in your email system the next you receive such an email from us.
Anyway, onto our commentary:
Believe it or not, this is the first time that we have written about an energy stock (any energy stock) in our weekly stock commentary. Our focus today is Petroleum Development Corporation (PETD).
First, a little bit of background. Readers who have not read my past commentaries should go back and read my last special report titled "Three Important Questions - Economic Survival in the 21st Century" so as to be able to get a background on today's energy situation in the United States around the world. Make no mistake: The bull market in commodities and in particular, oil, will continue. One commodity which I did not mention, however, is natural gas.
Until very recently, natural gas reserves and supplies have been ample in both the United States and in Canada. In fact, the United States produced approximately 85% of all its natural gas demand in 2003, with virtually the rest coming from supplies in Canada. However, demand is far outstripping current supplies. If the United States is to avoid a natural gas crisis over the next five to ten years, then it will need to both increase domestic drilling activity dramatically and also build a large number of LNG (liquefied natural gas) terminals. In the near-term, however, all new sources of natural gas is expected to come from increased drilling in the lower 48 states, of which the Rocky Mountains have the largest estimated capacity.
This brings us to Petroleum Development Corporation. As stated in the latest earnings report, the company is "an independent energy company engaged in the development, production and marketing of natural gas. The Company operations are focused in the Rocky Mountains with additional operations in the Appalachian Basin and Michigan."
Readers can read a more detailed description at the Reuters website but I want to highlight a few sentences from that description: "During 2003, approximately 19% of production was generated by Appalachian Basin wells, 18% by Michigan Basin wells and 63% by Rocky Mountain wells. As of the end of 2003, the Company's total proved reserves were located as follows: Appalachian Basin 21%, Michigan 13% and Rocky Mountain Region 66%. The majority of its undeveloped reserves are in the Rocky Mountain Region and the planned drilling for 2004 will be focused in that area."
Please note that the above emphasis is mine. The fact that the company has been focusing on the Rocky Mountains region makes very good business sense, as there is still a lot of potential discoveries in the area as well as the fact that the widespread construction of LNG terminals is still years away. During the third quarter of 2004, the company earned 52 cents per share compared to 31 cents per share during the same quarter in 2003 (a 68% increase in EPS). For the nine months ending September 30, 2004, the company earned $1.56 per share, compared to $0.90 per share for the first nine months sending September 30, 2003 (a 73% increase in EPS). The company is also approximately 50% hedged in both its natural gas and oil production through October, and December 2005 (respectively).
The quality of PETD's wells is also very suitable for a period of sustainable high energy prices, as the wells that they drill tend to provide a relatively steady and predictable supply of both oil and gas. Another quality that makes this company unique (in a good way) is its business model - in that four times a year, PETD offers investors a stake in its drilling operations - splitting the subsequent profits but also taking a 15% profit margin which provides a very good steady cash flow. Quote from a September 22nd IBD article: ""I would liken it to a mutual fund business," said analyst Philip McPherson C.K. Cooper. "They're an asset gatherer to drill more wells through their partnerships. When you compare them to other (E&P) companies. (Petroleum Development) has a diversified business model with their production assets and this sales business.""
The fundamentals look good, but what about the technicals? FWIW, PETD actually comes first in both fundamental and overall ranking within its peer group according to the IBD rankings. Technically, however, the ratings on this stock have steadily declined, but let's take a look at the following chart before we draw any conclusions:
Following is a daily candlestick cart of PETD. The stock has not done well at all since its recent peak in early October (as natural gas fell from nearly $10/MMBtu and as oil fell from $55 a barrel) - and this is why it has suffered in the ratings - but the action on Wednesday looks bullish, as the stock broke above its 50 DMA on moderate volume:
Like I mentioned in the above chart - the stock has bumped up against resistance for the last two weeks. If the stock was in a defined downtrend, then it would definitely not have broken out of its 50 DMA on Wednesday.
The following weekly chart of PETD also shows that the uptrend in the stock has not been broken, as it is still above its rising 40-week moving average:
Fundamentally (commodity wise as well as company wise) and technically, PETD still looks good here. On the daily chart, one can see that PETD has just broken out above its pivot point (its 50 DMA) and is only 4.5% above that pivot point - suggesting that one can enter a position right here if it doesn't move up a lot at the open (and in the morning) on Thursday.
Henry To, CFA
P.S. Please discuss this stock in our individual stocks discussion forum.