As we can see from the long-term chart of Ring Energy (REI) below, shares look very close to giving a buying signal. In fact, the MACD indicator has already crossed over, which is a bullish sign. This indicator is a combination of momentum and trend, and is very significant, in our opinion, on long-term charts. We state this because of how far the crossover is taking place from the zero-line on the technical chart. The further the distance from the zero-line (more oversold), the stronger the buy signal. The MACD crossover is also being affirmed by the strong bullish divergences clearly visible on the RSI indicator.
Furthermore, due to bullish momentum over the past 6+ weeks, the histogram has finally bounced back into positive territory. If one was extra conservative and wanted more confirmation that the lows were in for Ring Energy, one could wait for price to trade above the 10-month moving average. This resistance point (at approximately $1.57 per share) is close to 8% above where shares are trading at present (approximately $1.46).
Being chartists, we believe that every possible fundamental that could affect the trajectory of Ring Energy share price has already been reflected on the technical chart. This means that the firm’s recent acquisitions, asset sales, share dilution, as well as the recent increase of debt on the balance sheet, to name but a few, have all had their ramifications already embedded on to the technical chart. Therefore, let’s see if the key trends of the firm’s valuation, profitability metrics, as well the recent trend of the US dollar are painting a bullish picture for Ring Energy at present.
First, with respect to any potential value play, we place a requisite on the fact that the company in question must be turning a profit. Despite the fact that Ring Energy leveraged itself meaningfully with the Wishbone acquisition, the company is still expected to report a profit this year. Excluding the unrealized gain in the first quarter, EPS came in at $0.11 per share. Earnings expectations are up a good $0.10 per share over the past 6+ weeks due to how the price of oil has rallied. Present earnings expectations for this year come in at around $0.15. Obviously, this number is highly subjective. In fact, crude oil looks at present like it has topped and is dropping into a daily cycle low. If the price of crude were to drop below $30 temporarily, for example, Ring Energy’s 2020 earnings expectations would most definitely take a hit, no doubt.
Even if 2020 expectations drop, we still have some buffer there before we drop into negative territory. Ring Energy’s cash flow looks very attractive compared to the industry. In fact, over a trailing average, the company’s operating cash flow is well below 1. Suffice it to say, irrespective of the debt which recently came onto the balance sheet, Ring Energy’s operating cash flow numbers are demonstrating (especially if capex continued to get dialled back) that the firm can outlast the volatility we are seeing in energy markets.
If we look at the long-term chart of the dollar, we can see that the 200-month average continues to decline. Furthermore, strong divergences on the RSI and MACD indicators suggest that a long-term double topping pattern may be in play at present. If indeed we are correct on our premise, the dollar’s 2018 lows may be in jeopardy in the near term. Sustained dollar weakness is bullish for the price of crude oil as well as for Ring Energy. The near-term support level for the dollar is its 50-month moving average. If this level gives way, sub-90 levels on the dollar index is a certainty, in our opinion.
In terms of profitability, Ring Energy’s present ROA of 6.83% and ROE of 13.2% over a trailing 12-month average make for encouraging reading in this sector. Similar to our argument with respect to the firm’s cash flows, having these levels of profitability buys the firm time with respect to its operations.
Therefore, to sum up, although Ring Energy does not pay a dividend, we may initiate a long position here if we believe the risk/reward play stacks up. In the near term (assuming crude oil has temporarily topped), we may see some weakness in the company, which may bring forth a strong buying opportunity.
Elevation Code’s blueprint is simple. To relentlessly be on the hunt for attractive setups through value plays, swing plays or volatility plays. Trading a wide range of strategies gives us massive diversification, which is key. We started with $100k. The portfolio will not not stop until it reaches $1 million.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in REI over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Expecting further weakness before a solid bottom.