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Silhouette of a pump jack in Utah. (Denny Thurston/Getty Images/iStockphoto)
Silhouette of a pump jack in Utah. (Denny Thurston/Getty Images/iStockphoto)

Schizas’ Mailbag

Beware the head and shoulders pattern for this energy stock Add to ...

Hi Lou,

I was wondering if you would please do a review of Bonterra Energy. I have been considering purchasing some shares in this stock but it does not appear to trade at any great volume and the dividend scares me, is it good or could it collapse to a lower amount.

Thank you,

Bruce

Hey Bruce,

Thanks for the assignment.

More Related to this Story

Bonterra Energy Corp. is a dividend-paying oil and gas producer with operations in Western Canada. The company distributes 50- to 65-per cent of its fund flows to investors in the form of dividends which currently yield 6.14 per cent. The reserve life index for their proven plus probable reserves is 16 years and they have 10 years of undrilled locations on their agenda. The production mix is 72 per cent oil and liquids which, given the low price of natural gas, is a good place to be.

The tax horizon for BNE is 2016 when their accumulated tax pools are depleted. That will be a point that could reduce the funds available for distribution. Other risks associated with resource companies include profitable production growth, replacing depleting assets, and the biggest risk of all – the price of the oil, liquids, and gas that they produce.

A study of the charts will better inform a decision to buy or not buy this stock.

The three-year chart depicts a stock that caught a lift in late November of 2012 when it was trading at $37.00 and the MACD and the RSI signalled a buy. As we got to late January of 2013 a golden cross surfaced as the shares traded at $42.00, indicating that the advance had more to give. The break above resistance at $50.00 in late August was also signalled by the momentum indicators taking the shares to the highs just above $58.00. That however, was as good as it got.

The shares have been pulling back from an overbought situation and have breached support along the 50-day moving average. The stock has retested support near $54.50 and a further caution comes from what could be the near completion of a head and shoulders pattern. A head and shoulders pattern is a reversal pattern that would see BNE giving back more of the hard-earned gains generated over the last year.

Here is a text book illustration of a head and shoulders pattern for your consideration.

The six-month chart provides a close up of the sell signals generated in October by the RSI and the MACD and the retest of support near $54.50. The momentum indicators are not indicating that the selling has abated. From the research conducted on your behalf it would seem that your caution is warranted. The best course of action will be to continue your surveillance and determine if the right shoulder of the pattern forms at $56.00.

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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