New Trade $XCO: Contrarian Oil & Gas Play

by Dan October 30, 2013 11:34 am • Commentary

This morning a small oil and gas company named Exco Resources (XCO) reported disappointing Q3 earnings and sales causing the stock to make new 52 week lows with the stock down 10% (was down 14% at one point).  I don’t know much about the oil and gas sector, but I know that XCO is a well run company fighting some fairly nasty secular headwinds (full disclosure I know the CEO and he has been winning in this space for decades).

When the stock traded to $6 back in February, and I rode it up with the rise in NatGas into the spring and sold it for a nice gain.  The stock is very correlated to the price of NatGas, see below, XCO in orange and NatGas in white:

XCO vs NatGas 1 yr from Bloomberg
XCO vs NatGas 1 yr from Bloomberg

I would add that it is hard to come across too many stocks in this market where the sentiment is as poor as it is in relation to XCO, the stock is covered by 11 analysts without one buy, there are 9 Holds and 2 Sells with an avg 12 month price target of $6.63 that I suspect will be coming down with estimates in the next day or so.  Short interest sits at about 23% of the float.  One positive is that the top 5 holders account for almost 50% of the shares outstanding and they include the legendary oil investor T Boone Pickens who holds 4.25% and large hedge fund Oaktree Capital as the largest holder with a almost 17% stake.  One last thing the CEO back in 2010 tried to put together a buyout of the company to take it private at $21, but the financing fell through.

With the stock breaking down and then quickly bouncing and finding some footing I decided to buy some and put away for either a rise in the underlying commodity, or if the company is able to affect some positive change in their operations aside from the the price fluctuations in NatGas.

The one year chart of XCO is a mess, but it is holding where it needs to hold, at the prior 52 week low of about $6 (a tad below it now).  I am buying the stock here with a near term target of the ~$7, which also corresponds with the stocks 50 day moving average which could serve as near term technical resistance.  The next target would be about $7.50, the level it broke down from back in August.

[caption id="attachment_31941" align="aligncenter" width="589"]XCO 1yr chart from Bloomberg XCO 1yr chart from Bloomberg[/caption]

TRADE: XCO Bought Stock at $5.90

Trade Rationale:  There is no strong fundamental thesis here, and to be fair the chart looks precarious, I will use a $5.50 stop in the downside, or about 7%, while using a target to sell 1/2 my shares at $7, which would amount to a 18% gain on a portion, or more than 2x what I am willing to risk.  This is a fairly speculative trade, thinking of it more as a contrarian investment.  This could take some time so gonna leave a little dry powder to make one attempt at adding on weakness.