Long Run Explor Ltd Ord WFREF

Short term outlook

[wilwal]

With the bank review completed, changes made and market adjusted, the bottom is in.  For the next few months, the stock will trade with the price of oil until there are events occur to move it one way or the other.  With no news, the new trading range should be $.65- 1.00 as the price of oil moves up and down.  

Here are 3 of the more likely catalysts  that could occur........unrelated to oil prices that will move the stock up or down.

1. A sale of Redwater and Boyer.  This will raise in the ballpark of $300 million but will have the effect of removing the liquidation risk discount on the stock now of about 40%.   So whatever the price of the stock is at the time of sale, divide it by .6 and the stock should move up into that ballpark.  So for example,  with a price of .75, the stock should move to around $1.10-1.30.

2. A takeover.  The pumpers aren't going to like this but there is no way a takeover in the short term will occur at over $2.  It doesn't matter what arguments anyone makes about valuation but it just won't sell for more than 2X current share price because nobody will pay that much.  At the current trading range, look for $1.40-1.80 as the most any acquisitor will pay in the short term.

3. Cut capex to prepare for debt reduction.  Staying onside the loan covenants by paying debt down effectively with depletion is a valid strategy.  Personally, I think the market will not like that as they will see notable production declines and start to bail out on a shrinking company.  The company needs $100 million/year to maintain current production levels and have already spent over half of that already for 2015.  They can't cut it to zero so the market will question the efficacy of such a strategy and is more likely to punish the stock rather than reward it even if it does perceive that the company may squeak out the $245 million debt payment in May 2016.

There are numerous other events that could change things but the others are less likely or less dramatic than the 3 listed above.  The "business as usual" strategy as mentioned in the first paragraph is effective for only the next few months but as time passes toward the $245 million repayment date without a workable plan for it, debt worry will start to weigh on the stock.

It should be safe to buy in now or average down.   For traders, the other thing to watch closely for is the opposite to what we saw last week.  Last week the stock moved down when oil prices rose. That is a quality sell signal which turned out to be accurate and now we know why.  In the future short term, watch for a rising price accompanied with rising volume when oil prices are flat or declining.  That will be a good buy signal.  I don't think we will get a traditional sell signal in this manner because if management inaction causes a price deterioration, it is more likely to drift down or get lethargic to oil price rises over a longer period of time under that scenario.

Good luck to all no matter what your position strategy is.