Ophir Energy (OPHR) – Follow the money

Ophir Energy (OPHR) – Follow the money

Ophir Energy is an independent upstream oil and gas exploration and production company focused on Asia and Africa. Its share price reached a high of 76p in January before gradually slumping to the current level (latest share price 41.6p, market cap £294 million). After viewing the recent results and subsequent director buying of £158,401 and $31,056 between five of them I have opened a short-term position in the stock.

Operating cash flow

Looking at the income statement one would be tempted to avoid this; however, a closer look shows that of the $376 million loss, $309 million of this is impairment, so noncash. This obviously isn’t great, as it was once cash, and the impairment of the asset for sale means that the value has been written down by $309 million, but for new shareholders entering after the RNS it is already factored into the price.

Moving to the cash flow statement, we can see the cash being generated from operations. Thanks to the large quantity of non-cash expenses which need to be added back in (including asset impairments and the write-off of exploration expenses), the company is generating cash from operations both before and after adjustments for working capital.

(USD ‘000s, 6 months ending June 2018.)

Free cash flow potential

Ophir announced a strategic review in which it claimed that it “has an operating asset base capable of delivering free cash flow of $300 million over the next three years”. I normally assume that statements like this will never happen, but the fact that the board have bought plenty of stock would suggest to me that it is possible. That would mean the FCF of the firm over three years would be almost equal to its market capitalisation today. Not bad!

Cut costs and unlock value

Significantly downsizing the expensive London office and transitioning to an Asian HQ should be a good move for material cost savings and also put HQ where the business is operational. I am not a gambler, and so reducing Ophir’s exposure to frontier exploration and focusing on production growth is attractive to me and suggests a step change in how the business will be operating in the future.

Chart

All of the above is great, but in the end it doesn’t really matter. The price is always right, and the price of being wrong is heavy. What I’m really interested in is charts, though companies with solid fundamentals generally outperform those with deteriorating prospects!

From September, Ophir’s trading volume really started to ramp up. This shows clear accumulation of the stock and that this price area is a key area. Through into October the price has gently been rising on heavy volume, and in the past week of heavy falls across the board Ophir has held up – a sign of strength in a poor market.


Source: SharePad

The stock is now breaking out of recent highs and through the 50 EMA, which has previously been resistance. I am happy to ride the trend upwards and increase my exposure into strength, whilst upping my stop losses. This gives me the benefit of adding more potential upside for the same amount of risk. Keeping the risk constant and adding reward is something I believe traders should always look to do, because playing these probabilities over the long run gives you an edge. Cut the losers, run the winners.

 

At the time of publication, the author has a long position in OPHR.

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