Averaging May Be Worth A Shot Right Now

I have said in past weeks that I believe the mid-40s would provide support for WTI prices, and so far that has been the case. There has hardly been a spectacular rally but with WTI and Brent both posting gains in the last few days the rout has been stopped, at least for a while. For the opportunists among us that means that now is a good time to start looking for opportunities.

Those who have been burnt a few times on the way down by trying to pick a bottom may not want to over commit, even at these levels. With the IEA stating that they are seeing signs that "...the tide will turn..." before too long, though, here may be a good place to start averaging into a few positions. My trading room background makes me averse to the word “average” when it comes to position management as it is usually used as a desperation tactic by those who cannot bear to cut a loser. In that case averaging usually just turns a misfortune into a disaster. There are, however, two occasions on which averaging can be okay. First, averaging a winner is fine. Second, intentionally averaging into a position can be a good idea in volatile markets.

The idea is pretty simple. Find a stock that has been dragged down with everything else but faces fewer problems than many, and then divide your potential investment into, say, four trades executed at regular intervals. In this case, where the trades are longer term by nature, the gap between purchases could be as long as a month. If you are fairly sure that we are near the bottom for oil, and therefore natural gas, then you may want to make it over four weeks. The downside is obviously that you pay four commissions, but in these days of cheap online trades that is less of a disadvantage than it once was.

So, we’re all set to average in, but the question is, to what? For obvious reasons, E&P companies with exposure to shale have been the hardest hit on the way down. They are, in many ways, the cause of the problem and higher production costs make them vulnerable as oil and gas prices fall. Some, however, had the sense to hedge against further falls over the last quarter and are thus in a better position to ride out the next few months. Antero Resources (AR) would be an example.

In an operations update earlier this week, management revealed that all of their 2015 WTI production had been hedged at an average of $64.58/bl and most of their natural gas production at an average of $4.50. That stability of income will enable them not just to survive, but to actually continue with expansion plans. The announcement of the purchase of $240 million of drilling acreage in Ohio shows that they intend to continue growth. Some cuts in capex and maybe some rationalization of production in the short term would come as no surprise, but long term plans seem to be intact.

It appears that Antero is in a better position than many peers, but in the current panic that hasn’t saved the stock. AR has still nearly halved from 2014 highs. Of course if energy prices turn lower again and refuse to even edge back upwards then AR, along with everything else energy related, will fall further. If, however, we are close to the bottom then AR is likely to be one of the first to rally, given their strong hedging position and continued growth, even as others cut drastically. That makes it a good candidate for averaging into a long position.