Successful Trading Tips with John Bougearel

Six month’s ago, I introduced a small emerging growth stock company to readers, a natural gas producer out of Colorado New Frontier Energy Inc (NFEI).

The background summary read: “The company is accelerating shareholder value primarily by rapidly building its proven and probable reserves, rapidly increasing production. The foundation for rapid future growth for many years to come is now in place and set to commence in 2008.”

I will do a complete update on New Frontier Energy Inc in another month or two, after an independent company has reviewed the company’s proven and probable reserves for 2008, and after the release of the companies 10-Q for the first quarter of their new fiscal year ending FY Feb 2009. The first quarter ends in May 08, and the 10-Q should be released in early July.

In the meantime, there have been some positive developments in recent weeks for readers to consider. On April 21st, the company issued a new press release announcing gross production for March 2008 totaled 34.3 Mmcf. Year over year gross production increased 282% and revenues increased 463%.

In my December 2007 review of the company, I noted that the company CEO Paul Laird estimated the company would receive an average of $5.50 per MCF in 2008. Well, in the first month of their new fiscal year beginning in March 2008, the company received an average price of $7.78 per MCF. Revenues recognized in March 2008 per MCF were 40% above the CEO Paul Laird’s conservative estimate of $5.50 per MCF.

In large part, the reason why revenues recognized per MCF were so high is that natural gas prices had climbed 30% higher in March 2008 than they were in December 2007. But importantly it was also due to the new Rockies Express Pipeline “The takeaway capacity of the Rex West pipeline continues to provide Rocky Mountain producers improved pricing for natural gas and we hope our selling price will eventually approach parity with the widely quoted Henry Hub price in the future,” said Paul Laird. Natural gas prices at the Henry Hub probably averaged around $9.25-$9.50 in March 2008. As of May 2008, incidentally, natural gas prices are averaging about $11.00 in May at the Henry Hub.

In May 2008, the final month of the first quarter, the company will begin to benefit from its 2007 drilling program. “We intend to capitalize on this improved pricing scenario,’ said Paul Laird ‘by boosting production significantly during 2008. Our new compression facility which comes on line at the end of April will facilitate producing from 6 additional wells drilled during 2007.”

Manager of Exploration ~ Jubal Terry Standing in Front of the New Compressor

For investors wishing to get a handle on the company’s gross production for the fiscal year ending Feb 2009, they will have to look closely at the gross production yield during the month of May 2008 for an indication. Hopefully, the gross production numbers for May 08 will hit the ball out of the park. But, we are still a few weeks out from knowing anything.

Thus far, the anecdotal evidence suggests the increase in gross production and the increase in the average price received per MCF may allow the company to become cash flow positive in 2008 and begin to accrue earnings for the first time in its corporate history. The company does appear to be on the cusp of growing earnings. This would be a significant development and corporate milestone if achieved in 2008. We will have greater visibility with regards to company cash flow and possible earnings once the May 2008 production numbers which tie in production from the 2007 drilling program are announced.

While all that feel good stuff is happening at corporate headquarters and out in the field, concurrently, there have also been some positive developments beginning to accrue to shareholders (which includes moi - btw). Before elaborating on these positive developments, let me digress about my personal history with this company.

My history with this company goes back to company’s inception. Back in 1998, geologist Jubal Terry, now Manager of Exploration of NFEI, came to our trading group’s offices at the Chicago Mercantile Exchange looking to raise some capital. Jubal was fairly excited about the prospects for his geological findings at the Slater Dome Field in the Sand Wash Basin in Northern Colorado. Recognizing that energy prices would never again be as cheap as they were in the late 1990’s, our head trader figured this could be a great ground floor opportunity to gain some exposure in the energy sector. The other principal traders in the group all agreed. Looking back, it was an easy sell, that was followed by an agreeable lunch for everyone down at the Merc club. The capital that these traders provided, along with capital from two other investors out of Colorado, gave the company its start. Back then, it was called Skyline Resources. At the time, we hadn’t considered the fact that natural gas was the only clean burning fossil fuel, but a decade later, this clean energy designation as a fuel source is taking on increasing importance.

A few bumps in the road later, the company had to be reorganized into two companies, one of which was named New Frontier Energy Inc. Paul Laird would later be named the new CEO of the company. Paul’s arrival on the scene was an absolute good thing and he has impressed shareholders in many ways since he came on board. My personal favorite story to recount is how, early on in in his new role as CEO of NFEI, he went from door to door to every rancher in the Slater Dome Prospect to secure “perpetual access” and right of way permissions to lay an 18 mile pipeline through their property.

The whole process took well over a year and throughout was a delicate operation involving a good deal of tactfulness on Paul’s behalf. As Jubal Terry relayed to me, the situation “needed kit gloves.” It all began with a town meeting at the Savory museum in Craig Colorado. About 22 ranchers in a town of 200 showed up, many of them wondering just who the heck Paul Laird and NFEI were. Likewise, Paul had to take inventory of who the ranchers were. After the town meeting, Paul went door to door. Some ranchers showing zero interest, were outright uncooperative and presented certain obstacles that Paul would need to work around. In repeated negotiations with one rancher, Paul had to agree to redo the fellow’s driveway, and fix both his fence and pond. Others were considerably more helpful, suggesting “if you do it this way, we will help you” along. Wetland issues and Army Corps of Engineers concerns also had to be weighed and resolved. Granting perpetual access would be a non-starter with some family heirs thus requiring other work-around solutions.

But once all these negotiations were accomplished and solutions found, so began a cooperative working relationship between NFEI and the ranchers ~ now the two environmental stewards of the Slater Dome Prospect. In fact, from the de-watering processes involved, NFEI is now providing valuable clean water resources for the ranchers’ cattle herds.

Laying 18 miles of pipeline infrastructure would of course be costly, and in late 2004 and early 2005 New Frontier Energy Inc had to raise some more capital. This time, Westminster Securities acted as the underwriter. The head trader of our trading group and myself participated in this secondary offering. The offering went without a hitch, and the stock price made an impressive but brief run up from 0.65 cents to $3.25. The proceeds of the the secondary offering were to be spent on building an 18 mile pipeline and future drilling programs.

As exciting as that new beginning was in 2005, there were still a few hurdles the company would have to overcome and corporate milestones yet to achieve. In my mind, and in the minds of management and many other shareholders who follow the company closely, the turning point for the company came in late 2006 and early 2007 when NFEI took 100% control of their own destiny. Up until 2007, the company only had a 30% working interest in the Slater Dome Field. Before that, the operator of the Slater Dome Field, with a larger working interest, had been Cedar Ridge. Cedar Ridge is a subsidiary of Stephens Inc (which I am told from clients down in Arkansas owns more natural gas reserves than any other company in the US). Much to my surprise, Cedar Ridge as operator of the prospect proved to be both a nuisance and a risk to NFEI management and shareholders. In general, Cedar Ridge showed a good deal of ineptness, and worse yet, their operating expenses were astronomical - way above industry standards. Skillfully, the company management negotiated a buyout of Cedar Ridge’s entire working interest in the Slater Dome Field by late 2006. Of course, the buyout necessitated a third capital raise but fortunately, raising capital has never been an obstacle for the company. It was a great relief to all NFEI stakeholders to get the Cedar Ridge monkey off our backs.

2007, therefore, was a transitional year of retooling for the company. The range of the stock price was 0.93 cents to $1.50. On the chart below, you will see a trendline drawn of the highs of 2007 pressuring the stock price down into May 2008. Then suddenly, in the past two weeks, the stock price broke out above that trendline on higher volume. Being a market technician for the past 15 years, one observation I am always quick to point out to clients, traders and investors, when you can’t take out a previous years lows when tested, there is a great probability that the previous years highs (at $1.50) will be challenged and exceeded. I could extrapolate that even further and speculatively suggest that if a company can’t make new record lows, it will challenge or exceed the record highs at $3.25. Ultimately, however, market mood swings from excessive pessimism to extreme optimism coupled with the intrinsic value of companies future cash flows will play the largest role in determining share price.

Being a shareholder and a market technician, I have been watching the bid/ask book more closely than anyone over the past few years. It has been boring me to tears. Still, I have learned a few things. For instance, I learned that the biggest sellers of the stock over the past three years, not surprisingly has been Westminster Securities (WMIN) - our underwriter. The shares Westminster has sold on the open market played a large part in pressuring this companies stock price down from $2.45 a share in 2006 down to $0.93 in 2007. I know this because I watch the book. I have had a keen interest in watching when the overhead supply of shares from Westminster would be absorbed by stronger hands. It is now possible to suggest that the transfer of shares out of the weak hands and into stronger hands has now taken place.

If the assessment that the company shares have now fallen into stronger hands, then the majority of the existing shareholder base as it is composed right now are like myself ~ in it for the long haul” ~ or at least until Paul Laird either sells or leaves the company. There is something to be said for a shareholder friendly company management, and that has been amply demonstrated thus far over the past several years by Paul Laird and his management team. This is no small consideration when it comes to making an investment decision for the long haul.

Circuitously, I must return to why I am writing this post in the first place. Last week, on Friday May 5 2008, I sent the following memo off to our trading group ~ the original shareholders of Skyline Resources. As a shareholder, I was obviously pleased with the way the week of May 5th ended for NFEI shareholders. In my exuberance, I gave a play by play description of how the trade went in the bid/ask book that week.

The trade today in NFEI’s stock was a beauty to behold. The day began innocently enough with a tight bid/ask spread of 1.12 bid and 1.13 offer. Some small bids in the morning nibbled on the offer 4000 times. The 1.13 offer, anxious to just “Git R Done” before the weekend, decided to test the firmness of the patient 1.12 bid and hit the bid 10000 times at 2:23:07 in the afternoon.

Well, this was the trigger that Mr. 1.12 Bid had been looking for all along. He went to work immediately, and inside the next 60 seconds, he hit all the offers all the way up to 1.16, buying 17,000 shares in the process. For good measure, another 7500 shares were bought in the closing hour to settle the session at 1.17.

The good news is that this weeks range “ENGULFED AND CLOSED ABOVE” last week’s range. In fact, last month’s high in April was 1.15. So with a monthly close above 1.15, Engulfing the range of all of April, that would be a second confirmation of a bullish change of trend. This is a weekly bullish reversal signal ~ and a very positive sign that the market will be “LOOKING UP” for the foreseeable future.

This is very good news indeed that the “fever” has broken. Hats off to the Lone Ranger at 1.12 today, in less than one minute at the snap of the fingers at 2:23 pm this afternoon, he changed the entire outlook for shareholders. Mr. 1.12’s execution is to be commended.

Btw, 1.17 is unchanged on the year and the high of the year is 1.22. Guess where I would like to see the closing price of NFEI at the end of the month?

One week later, the stock rose to new highs on the year up to $1.30. As Bogart said at the end of Casablanca, “Louie, I think this is the beginning of a beautiful friendship.”

Now you all know about as much as I do about New Frontier Energy Inc., which is close to as much as anyone knows about this company. On behalf of our trading group at the CME who provided the original seed money, the job fell to me to stay on top of company developments at NFEI over the years and be responsible for staying in close contact with the company management.

Best of luck to anyone who decides to stick their big toe in the water. The outlook at NFEI is very positive at the moment, but remember that as a shareholder I am talking my own book, so bear that in mind and do your own due diligence please! A good place to start might be to speak with Bill Conboy at BC Capital Partners. His contact info is http://www.bccapitalpartners.com/

The New 2008 Slater Dome Compression Station

The news hounds believe that it was Retail Sales (ex-auto) that blew treasuries over today. Pure poppycock, here is look at the breakdown of retail sales y-o-y for April 08.

The problem lies with import prices out today) and producer prices (out next Tuesday). Things cost more and we consume less. It is called stagflation, it’s that simple. Import prices rose 15.4% in April 2008 y-o-y.

Meanwhile, producer prices y-o-y have not been slouching either as it has averaged 7.1% y-o-y since November 2007. This is the fastest increase in producer prices in over 25 years. The only time producer price increases exceeded this accelerated rate of change was during the 1970’s inflation spiral.

On top of all this, Bernanke was in the news today hinting that he won’t hesitate to increase the money to be made available at the term auction windows. I won’t argue that providing as much liquidity as needed during this crisis is the right course of action, but it should be at the “penalty rate” prescribed by Walter Bagehot, not to avert moral hazards of excessive risk taking, but just to show some restraint in measures that could be construed as inflationary. Just do not expect this tonic of Bernanke’s to sit well with bond vigilantes.

Worse yet, several Fed officials sounded sudden alarm at the increasing inflation pressures they are helping to create with their measures. Cleveland Fed President Sandra Pianalto sore core inflation is rising too fast (she must be on crack, cause that is the one inflation measure that is not in a running away from us. Twelve month annualized Core CPI is running at 2.4% far below the 7.1% PPI and 15.4% for imports. Even better Core CPI for the last three months shows the Core CPI decelerating to 2.0%. Obviously, Core CPI, by government design, captures everything that does not going up.

Bond investors should take note, because Core CPI hits the market tomorrow morning. And for some strange reason, bond markets love to turn on CPI reports. (I will detail this in a separate report momentarily) If they turn back up on tomorrow’s reports, they will do so in denial of all the inflation pressures hemming in and surrounding the Core CPI numbers. Not only is Pianalto on crack, but her intimation that the Fed’s current monetary stance is compatible with low and stable inflation shows she either has a conflicted sense of reality or she is full of spin-doctoring.

A more balanced San Fran Fed Janet Yellen said she was cautiously optimistic commodity prices will level out. Fed President Hoenig flat out said the current level of inflatin is unacceptable and that the Fed will “face a major challenge in the second half of the year” assuming the economy begins to find its footing (which is still a really big assumption on Hoenig’s part).

Wednesday, May 07, 2008

“Productivity is solid and labor costs are slowing and this will take the pressure off inflation and the Federal Reserve,” said Mark Zandi, chief economist at Moody’s Economy.com following today’s productivity and costs report. Meanwhile, across the Atlantic, retail sales in Europe declined 1.6% in March, providing further anecdotal evidence of the anticipated slowdown in Europe.

“This is pretty grim,” said Ken Wattret, senior economist at BNP Paribas in London. “The big picture has been very weak for some time and up until this point the ECB has been in denial. They keep on cheerleading the improvement in consumption, but it simply hasn’t happened.”

Stories like these should be supportive of the longest end of the treasury curve which has been under pressure ever since the 75 bps rate cut on Jan 22. Some of the weakness in the 30 year on Tuesday can be attributed to two considerations. First, to a lesser degree, the quarterly refunding for the 10 and 30 year treasuries on Wednesday and Thursday had been causing some apprehension, but I doubt it will prove much warranted when all is said and done because the 10 year yield at 3.90% is 190 bps above the Fed Funds rate.

Secondly and more importantly was market participants reaction the FNM earnings report and the subsequent announcement that they would raise $6 billion in capital, beginning with $4 billion that same day. This cheered equity markets for the day and they had an impressive rally. That rally weakened treasuries.

But that equity rally based on the FNM capital raise is quite suspect. Initially, Bloomberg reported that FNM would begin a “a $4 billion sale of common and convertible preferred shares today.” However, in a Bloomberg update later that day, that changed to “is marketing $2 billion of convertible preferred stock at a coupon of 8.75 percent to 9.25 percent, according to a person familiar with the offering.”

Where did the other $2 billion go? If FNM anticipated initiating a $4 billion and then reduced that to $2 billion, that could be a big problem for equity investors, if FNM announced one thing and then did another. It is reminiscent of what Ambac did back in February, promising they could do a $3 billion capital raise, and then returning the market and announcing it was a no-deal.

Somehow, Ambac did manage a $1.5 billion equity offering by early March. But Ambac remains a huge overhang for the credit markets after their Q1 08 earnings report. Ambac still requires more capital, but several analysts now question their ability to raise capital in the bond and equity markets after their Q1 earnings. Ambac’s problems could well disrupt the financial markets with more negative shocks as early as the second half of May as the credit rating agencies continue to review Ambac’s books – regardless of any bogus negative surprises out of FNM.

All told, I anticipate the downside risks in the 30 year treasury will diminish considerably for the remainder of the month, even if the May 14 CPI and May 20 PPI reports are inflationary.

As mentioned in the weekend treasury report, in spite of the bearish head and shoulders pattern on the daily 30 year chart, the pattern on the 30 year weekly chart remains bullish and suggests the market is simply carving out a “bull flag” in 1 H 08 ~ which will resolve to the upside as the market focus reverts from a lessening of a credit crisis thanks to the freely lending Fed to the evolving recession and housing crisis of which the Fed can do little but stand by and watch now. That is the reason the long end of the curve will be more needed than ever to step up. Where the Fed has to step aside, the 10 and 30 year treasuries need to step up and function as cushion to an ever weakening economy in the form of lower yields. I may be wrong in making this assessment, but from a technical perspective, I can certainly argue the case that this probe below the year close at 11612 this week will not be sustained against the February and April lows at 11503-11504.

To wit, on the combined intraday chart, we see there has been a “false auction” underneath the April low at 11504 today and yesterday. We also note a broadening formation has occurred between April 23 and May 7. Broadening formations are reversal patterns, and suggest the bearish trend from the March 23 high may be ending as I write this report.

The bearish head and shoulders on the daily chart could be wrapping it up on today’s 10 year auction.  The auction results are now in, and while I haven’t read the announcement, the results of the auction did not take the 30 year below the Feb low at 11503 or the April low at 11504, so today’s intraday probe down to 11428 supports the notion that this was indeed a  “false auction” below 11504 earlier today.
Market participants should consider two other factors. First, the high of the year was set on a Wednesday, as was the low on February 20th. Today also happens to be a Wednesday, and I like seeing this predisposition to turn on Wednesdays. Moreover, the low on Wednesday December 26 was set in stone on the 2 year auction. The 2 year auction definitely caused angst for market participants in December, and there has been some angst noted going into the auctions this week as week.
Oh, and a third consideration. The lows this week are being supported by the 200 day average (approximately a three quarter moving average - the one year average is sloping into the half mast target near 11400). Investors should note that the only time spent under the 200 day average in 2007 was when the world temporarily thought we had an interest rate “normalization” thingie going after a global and domestic upward shift in the Q2 07 GDP data.  If anything, all I hear about are downward shifts in 1 H 08 about global GDP data from the IMF and elsewhere. So, tell me how you sustain a trade in the 30 year on a closing basis under the 200 day average without an upward shift in the domestic and global GDP data? You don’t, is the appropriate answer.  In fact, it bears repeating that the March durable goods report showing an inventory buildup is going to be a drag on Q2 08 data.

Say Good-bye to Go Daddy, and say Hello to Word Press. Over the past 9 months of blogging, I discovered too many limitations with Go Daddy’s editor. This prompted the migration to WP.  Word to the wise, the migration is huge pain in the ass.  Had I known then, what I know now, right!

If you scroll down a bit, I have added about 6 new posts to cover much of the market action over the past two weeks. I still have to learn how to ftp charts, however. Hopefully, that will resolve itself later today.

Sorry bout the interruption over the past few weeks and pardon my Dust~ while I finish the ops.

Mille Grazie