Buying any stock which has experienced high volatility in its share price is a risky move. It can mean an investor sees significant paper losses in the short run, since investor sentiment can quickly change. In the case of IGAS Energy (LSE: IGAS), its share price had fallen by over two-thirds since the start of the year before jumping 20% on Monday.
Clearly, this could be little more than a ‘dead cat bounce’. This is where a share price temporarily rises after a large fall as investors look to cover their short positions. As such, over the medium term, the company’s valuation may continue its decline. However, could it also be the start of an improved performance which sees the business continue to recover towards its 2017 high.
Mixed performance
According to the company’s most recent results, it is making some progress with its strategy. The producer of hydrocarbons in onshore Britain has been able to complete its capital restructuring and fundraising. This was crucial for the business as it reduced net debt from £100m at the end of December 2016 to £7m at 30 June this year. This debt reduction should create a less risky business which is well-funded for its immediate operations, with a cash position of £16.3m and positive cash flow providing further evidence of this.
While revenue increased from £12.1m to £16.8m in the first half of the year, maintenance issues mean that production for the full year is expected to be 2,250 barrels of oil per day (bopd). Meanwhile, operating costs have risen by $1 per barrel to $28.50. At a time when oil prices remain at a relatively low ebb and many of its peers have been able to cut operating expenses significantly, this does not suggest the company is performing relatively well in that respect.
Outlook
In addition, the huge potential for shale activity in the UK is moving along at a relatively slow pace. Despite this, IGAS has stated that momentum in the industry is continuing to increase. For example, it is focused on developing its sites in Nottinghamshire. It is also seeking to advance activities at its site in Ellesmere Port, as well as across its acreage in the North West and East Midlands.
However, with there being a number of stocks in the oil and gas industry which offer greater size, scale and profitability at the present time, there may be better options available elsewhere for long-term investors.
Certainly, the company’s 20% surge on Monday could be the start of a period of sustained capital growth. However, equally it could prove to be a dead cat bounce. In the long run, with the price of oil and the prospects for the wider oil and gas industry being uncertain, it may be prudent to buy stocks with diverse asset bases, low operating costs and improving profitability. Such companies may offer the most compelling risk/reward opportunities for the long run.
