- Houston American rose 30% Friday and 150% premarket today
- This could mark the resurgence of fracking
- All driven by the rising global oil price
- Oil Trading Guide – How To Trade Oil
Houston American Energy (NYSE: HUSA) stock is up well over 200% since Friday’s opening. This could mark the resurgence of fracking as an investing sector – or it could be people merely thinking that it might be. Therein lies the trading decision.
The background here is both financial and also technical. It’s worth a walk through the factors that affect Houston American to try to work out what is happening.
Houston American is largely based in the Permian Basin in the US. It’s an oil, gas, and condensates producer. It’s small, perhaps a $20 million valuation and sales in the last reported quarter were around the quarter-million-dollar mark. This is indeed small. It made losses on those sales too.
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But of course losses and profits for oil companies depend upon the global oil price. That rises and costs stay fixed then losses can quickly turn into profits. A small and loss-making oil company is thus a leveraged play upon that global oil price. The global oil price has just gone up to $140 a barrel or so, the Houston American price has more than doubled. That’s what leverage means.
Now, if it were just this then that’s pretty much it. We use Houston American as our leveraged play on the oil price because we don’t want to play in futures or something like that.
But that’s not all it is either. It’s possible to go fracking – to increase production that is. Fracking is the only way of developing new production in any short-ish period of time. Conventional fields take decades to develop, a fracking well can be producing within months.
So, the possible play here on Houston American is not just that its current production has switched to being profitable. It’s that expanding production might also be profitable. This produces more leverage on that share price, therefore.
We’re also seeing comparable rises in companies like Nine Energy (NYSE: NINE) which is an oil services company for complex wells, Ion Geophysical (NYSE: ION), and so on.
It isn’t that these companies are going to benefit more than the majors like BP or Shell. Rather, they’re all small companies which were – as with Houston American – unprofitable or perhaps only barely so. So, the oil price moves over their pricing point – for the services companies, where more drilling and exploration will increase their servicing volumes – and we get this highly leveraged result.
It’s also possible that people are just trading the news as if all of the above is true. The trading decision for us is to decide whether this is likely to continue or that the effect will fade away.