Wednesday, July 23, 2008

Between a ROC and a hard place

ROC Oil is an oil production and exploration company with tenements in Australia, China, Britain and Africa. It is listed on the Australian Stock Exchange.

I have been long for some time, but the share price is getting a shellacking.

I will post my thoughts on the business operations and management in another post. This post is a post mortem of how I believe I went wrong with this trade.

First, I wanted an oil stock to hedge my other holdings, and to take advantage of increasing oil prices. I bought a small stake at the start. Prices dipped and then firmed, and I waded in with a bigger stake on the upturn. I had even written down a stop loss point.

The price tanked. The funny thing was two black swans occured. Roc announced a massively diluting takeover of Anzon Oil, which has no exploration assets, just a production resource with its reserves estimate at risk. This takeover will dilute the exploration upside potential of Roc, although I can see the rational of increasing production income to fund the exploration on a larger scale. Then the much beloved CEO suddenly went ill and passed away. The negativity surrounding this stock is such that it responds not at all to oil price increases, but responds massively to oil price decreases. It also responds not at all to exploration goods news.

Mistake one was not selling at stop loss point. Mistake two was not selling when it was evident that the reason behind the trade is obviously incorrect.

Now what do I do? I am looking at a paper loss of about 25%. So I need to reassess as to whether there are any reasons to hold this stock at this price.

Which brings me to my next post.


Justin said...

Peter, I'm a ROC shareholder and have been since mid-06. I agree about the bad unforseen news, particularly the passing away of John Doran.

However, I would suggest hanging on to your investment for a few reasons:
- I wouldn't be surprised to see the Anzon takeover get ditched once a new CEO takes over. Very few CEO's keep going with their predecessor's exact strategy.
- Wait until Roc announces the results of its drilling in Angola. Based on my understanding, it is looking good and any positive news should cause a share price re-rating.
- Roc had an amazingly bad run of drilling results all over the world; something like 15 wells drilled for no result. I just can't see that bad run of luck continuing.

Of course, a lot depends on how much you invested in Roc -if it's a significant %'age, then you may want to sell some, if it isn't then let it ride I say!

Peter Phan said...

Thank you for your feedback Justin. My portfolio is currently 60% in cash, so the adverse movement is not material. I am finishing up some further comparative due diligence, and I will set out my decision and reasoning in the next post.