Amid the backdrop of the Federal Reserve’s aggressive campaign to control inflation, some hydrocarbon resource specialists like Vaalco Energy (EGY) incurred choppy, volatile trading despite their underlying relevancies. However, a massive global catalyst may have changed the outlook for EGY stock, thus sparking significant activity in both the open and derivatives markets.
First and foremost, crude oil prices surged as the Organization of the Petroleum Exporting Countries and other oil-producing nations – an alliance known as OPEC+ – imposed a surprise production cut. Specifically, the member states reduced output by 1 million barrels per day (bpd). Further, as Barchart contributor Rich Asplund stated, crude gains accelerated after the U.S. dollar index dropped to a one-week low.
Moreover, Asplund noted another upside catalyst. “Crude prices have carryover support on global supply concerns due to the ongoing halt of 400,000 bpd of oil exports from the Turkish port of Ceyhan. The Iraqi government and Kurdish officials have yet to agree on the resumption of oil exports from Ceyhan, as Iraq says Turkey should not allow Kurdish oil to be exported from the Turkish port without Iraqi government approval.”
Against this geopolitical cacophony, EGY stock represented one of the highlights for Barchart’s screener for unusual stock options volume following the close of the April 3 session. In particular, total volume for Vaalco options reached 6,171 contracts against an open interest reading of 57,997. Further, the delta between the Monday session volume and the trailing one-month average volume came out to 782.83%.
Drilling down, call volume reached 5,713 contracts against put volume of only 458. This led to a put/call volume ratio of 0.08, mathematically favoring the bulls. Moreover, stock options flow data from Fintel indicates a relatively large spike in bullish sentiment for EGY stock. That’s hardly surprising given the fundamental narrative. In addition, below are three other factors to consider:
Inflation is Far from Over, Thus Benefitting EGY Stock
If any one takeaway exists from the OPEC+ production cuts, it’s that the inflationary crisis is far from over. The move also demonstrates that the Fed and other U.S. government agencies don’t own a pure hegemony over the trajectory and stability of the dollar. With oil-producing countries flexing their muscles, the job of taming inflation just got much more difficult for Fed Chair Jerome Powell.
At this point, OPEC is almost goading the central bank into aggressively raising interest rates. Of course, if it does just that, the global economy – including OPEC member states – will suffer. However, Americans won’t receive a reprieve. Whatever happened in 2022 regarding mass layoffs and worse could be on tap for consumers and investors.
Nevertheless, EGY stock might win out no matter the direction the Fed takes. Even under a hawkish environment, people need to get around. Therefore, demand for hydrocarbons should stay relatively healthy. Of course, if the Fed goes dovish, the spike in inflation should lift Vaalco and its ilk organically.
Vaalco Benefits from Compelling Financials
While EGY stock enjoyed a strong session on Monday, popping up nearly 11%, it hasn’t sparked consistent success. For example, in the trailing one-year period, Vaalco shares gave up 26% of equity value. Because of the red ink, many investors turned to other opportunities within the energy ecosystem.
However, it might be a mistake to ignore EGY stock altogether. While it does have some rough edges, the underlying enterprise benefits from compelling financials. Perhaps most importantly at this juncture, Vaalco offers a stable balance sheet. In particular, its cash-to-debt ratio stands at 21.07 times, ranked better than 77.86% of competitors in the oil and gas industry, per Gurufocus.com.
Operationally, Vaalco features a three-year revenue growth rate of 24.7%, far above the sector median value of 5.1%. As well, its net margin pings at 19.01%, outpacing 72.51% of sector rivals. It’s worth noting that Vaalco’s return on equity is 45.64%, far higher than the sector median of 8.83% and reflective of a high-quality business.
Finally, the market prices EGY stock at a forward multiple of 2.23 times. As a discount to earnings, Vaalco ranks better than 95.68% of its peers.
Analysts Love It
For full disclosure, the Barchart Technical Opinion indicator rates EGY stock as a 32% sell, warning readers about its weak short-term outlook. In addition, its 60-month beta stands at 1.60, indicating far higher volatility than the benchmark equities index. Therefore, Vaalco doesn’t get much analyst coverage. But when it does, analysts seem to love it.
At the moment, Barchart notes that two analysts cover EGY stock, a 100% increase from the one analyst covering the opportunity three months ago. However, both peg Vaalco as a strong buy.
According to data from TipRanks, one analyst from Stifel Nicolaus rates EGY stock as a buy. As well, the expert forecasts a price target of $10.71, implying over 113% upside potential. For those willing to take a risk, Vaalco could be intriguing.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
