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Mt. Kilimanjaro in the Amboseli game park in Kenya. (KAREL PRINSLOO/AP)
Mt. Kilimanjaro in the Amboseli game park in Kenya. (KAREL PRINSLOO/AP)

Schizas' Mailbag

Africa Oil Corp. pulling back after a huge advance Add to ...

Hi Lou,

You have a rookie investor here. I am curious as to what you think of Africa Oil Corporation.

Thank you for any info regarding this stock.

Sincerely,

Brian.



Hey Brian,

Welcome to the greatest opportunity in the world to improve your economic situation. Investing at its core is about risk management. Through our research and analysis we seek to reduce risk and improve the prospects for making a profit. The beautiful thing about capital gains is you only have to pay taxes on half of it as a resident of Canada. If you have bought the shares in your tax free savings account the gain is 100 per cent free of tax.

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Africa Oil Corp has a huge land position of over 300,000 square kilometers in East Africa with exploration blocks in Kenya, Ethiopia, Puntland (Somalia), and Mali. The company also reported cash holdings of $109-million that they plan to use to fund their drilling and seismic programs. Another fact that surfaced in conducting research on your behalf is that the company, through a joint venture partner, is using Full Tensor Gravity Gradiometry to identify drilling targets. Utilizing advanced technology to conduct aerial surveys is something that gets me excited given that I live on one of the largest land masses in the world that has been woefully under explored.

One of the factors that you cannot ignore when you are evaluating an investment is the political environment that the target company is operating in. Clearly the countries mentioned impose a higher level of risk for a number of reasons, one of which is the fragile regulatory framework pertaining to the energy industry. Now that we have laid out the narrative case, a review of the charts will provide another level of insight into the analysis.



The three-year chart sketches the advance that started in early October of 2011 as the stock built a base at $1.25. The uptrend have taken the shares through resistance at $1.50, then at $1.75 and finally through $2.25. The big gap up in late March of 2012 was in response to the announcement of an oil discovery at their Ngami-1 well in Kenya. The company plans on drilling four more exploration wells this year and to shoot 2,000 kilometers of 2D seismic.

The six-month chart tells the tale of investors taking profits after a healthy run. Selling came into the stock as it hit $4.25 as the MACD and RSI both signalled the shift in momentum. What is also evident is that the shares had gotten ahead of themselves and needed to consolidate a bit. At this point I would want AOI it hold support at $3.50. If you own shares in AOI I would take a profit and see how it progresses after it has finished pulling back. If you are thinking of buying it would be advised to wait for a shift in momentum to the buy side.



One last thing to keep in mind is that AOI is still not reporting a profit. Announcing an oil discovery is great but the real proof in the pudding is getting it to market and getting paid for it. You have done really well as a rookie. Identifying a pure exploration player with a huge land base, lots of cash, and making use of advanced technology to identify drilling targets. Pretty exciting isn’t it!

Make it a profitable day and happy capitalism!

Have your own question for Lou? Send it in to lschizas@globeandmail.com.

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