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(Spencer Platt/2010 Getty Images)
(Spencer Platt/2010 Getty Images)

Schizas' Mailbag

Bonavista Energy: not a buy quite yet Add to ...

Lou,

I have held this asset for some time and have generally been satisfied with it but recently it has been shedding value faster than its counterparts. May I have your thoughts as to whether this is due to falling natural gas prices or something else I should be watching?

Thanks,

Jack



Hi Jack,

I last examined the case for Bonavista Energy Corp. on May 25, 2011 when the shares were trading for $28.26. At the time the stock looked like a hold with good long term prospects. However the stock broke support along $27.50 in early August of last year.

More related to this story

BNP’s production is leveraged to natural gas and it would be hard to imagine how they could avoid the consequences of weaker prices for the commodity. Let's spend some time with the most recent charts to see how best to proceed.

The three-year chart depicts the support at $27.50 that was breached in early August of 2011. The MACD and the RSI both signalled the shift in momentum towards selling and a death cross formed shortly after the break below support. Currently there is support at $22.00.

The one-year chart for natural gas tells part of the story behind the selling pressure that has gripped BNP. With 61 per cent of the company’s production on the gas side it is clear the shares got sideswiped as the commodity sold off. Fortunately most of the natural gas is liquids rich providing better returns that simple dry gas.

The company upped its 2011 capital budget to $600-million from $375-million to shoot for a more balanced output of natural gas and oil. In my last post it was noted that the company relied on natural gas for 66 per cent of its production so there has been some progress made. The capital budget for 2012 is estimated to be in the $400-to $425-million range.

The RIS on the six-month chart indicates that shares are becoming oversold. The MACD has yet to signal a shift in momentum to the buy side.

Another factor that hurt BNP was that they missed Street estimates in the second and third quarter of 2011. Although frankly it’s hard to make forecast when commodity prices work against you. The company is scheduled to report fourth-quarter earnings on March 5, 2012.

BNP is a prime example of why you have to watch your stocks closely for changes in the environment that could affect your investment. In this case it was a selloff in the price of natural gas and the missed estimates.

Currently I would look for a bounce off of $22.00 and some buying to come into the shares during the period of seasonal strength for energy shares. With a dividend yield of 6.5 per cent you are getting well paid to wait.

Make it a profitable day and happy capitalism!



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