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9/4/2018 — Oil and Gas
Why the equities price disconnect?

The Canadian listed company that is a significant petroleum producer in New Zealand has asked why the significant oil price recovery has not been reflected in the share price of involved companies.

In its latest newsletter TAG Oil Ltd (TSX: TAO; OTCQX: TAOIF) said that over the past year, there has been a remarkable recovery in oil prices, with Brent up over 40% from this time a year ago - and up about 60% since the lows of June 2017.

“Oil and gas equities however, have not fared as well as the underlying commodity. The NASDAQ Large Cap Oil & Gas index is essentially flat from a year ago, while the small cap index has fared even worse, being down 7%,” TAG said.

What is driving the disconnect between oil and equities and oil prices?

TAG said clearly there is a lack of interest from the broader market. While oil prices have remained strong since the end of 2017, equity investors seem to be questioning whether the recovery is for real, or if there is a risk of prices returning to the $US40 (per barrel) lows of last summer.

“Also, the benefits - higher earnings and cash flow - are just starting to show up in oil company results, as organisations report their Q4 2017 earnings: While oil and gas specialists will be the first to pick up on the good news, generalist investors will be further behind.”

TAG said it should also be noted that investing cycles take a while to set in, with the largest companies in any given industry the first to get attention and benefit from an upswing.

This, the company said, explains large cap oil and gas’s relative outperformance compared to their small cap peers. However, once the cycle firmly sets in, it is typically the smaller companies that make the biggest moves—and generate the largest returns.

In meeting potential investors at recent conferences, TAG has noticed an increase in interest in the oil and gas sector compared to a year ago.

“While we’re impatient for results, we take this as a positive indication that the recovery in equity prices will soon follow the recovery in crude prices seen over the last nine months.”

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