Gastar Exploration (NYSEMKT:GST) is a highly speculative natural gas company based in Houston, Texas, that engages in the acquisition, exploration, development and production of mostly natural gas and very little oil in the United States, with a strong allocation to the highly popular Marcellus Shale territory. As of December 31, 2010, the company held leases covering approximately 33,400 gross acres in the deep Bossier gas play in the Hilltop area of east Texas; and had approximately 87,700 gross acres in the Marcellus Shale in the Appalachian area of West Virginia and central and southwestern Pennsylvania. It also owned an average non-operated working interest of approximately 40% in approximately 43,400 gross acres within the Powder River Basin of Wyoming and Montana.
GST recently reported uninspiring earnings during this current commodity correction, which is fueling a strong downside move over the past few days. To most, the uninspiring earnings were expected, but to the overly optimistic, they were cause for concern. Most of the production growth is planned to take place in the second half of the year. This means we are unlikely to see any inspiring earnings from GST until they report third quarter earnings, a full six months away.
J. Russell Porter, Gastar's President and CEO, stated, "Our increasing level of drilling activity in the liquids-rich areas of the Marcellus Shale and our continued analysis and testing of the production potential for oil on our East Texas acreage should position us for much higher liquids production volumes in late 2011 and in 2012."
That is why this is still a highly speculative play, and speculative plays thrive on potential, faith and even a little luck. I see the potential there, especially as natural gas becomes more embraced around the world in the coming months and years. While natural gas may not be a perfect replacement for oil, it is a solid "bridge fuel" to assist in reducing us from our overdependence on crude. GST is priming itself to significantly benefit from any natural gas boom over the coming years and the chart is falling to a level that is providing a great trading opportunity. That is, unless we receive another devastating market collapse like we saw in 2008 taking us to unforeseen oversold levels.
Technically speaking, the chart is in a downtrend and recently broke below a key support level at $4. If you have a longer timeframe for this position, preferably 30 to 60 days or more, GST might be a good area to allocate some of your portfolio. I tend to discuss mostly day trades and swing trades (which consist of a timeframe of up to a few weeks), but GST may be falling towards a price that I cannot pass up during a market that is very uncertain and my timeframe must extend for this type of opportunity to make sense.
GST is in very oversold territory, per the RSI indicator as it has touched 26. Historically speaking, over the past year when it has tested RSI between 25-27, it has rallied from these levels creating a favorable setup to profit into. This is a great time to start profiting and reducing exposure while we watch for it to downtrend again. I expect to maintain a core position to which I will trade around it to lock in profits while still maintaining exposure to this high potential yet highly speculative company. If we rally very strong, I will continue to reduce my position, adjust stop losses a bit higher and keep an eye out for GST having a share offering. With speculative companies that are still building up their fundamentals, we must always be prepared that a share offering will take place on a strong rally. These companies can always use additional capital and if the stock is appreciating rapidly, we should not be shocked to see one.
Normally, I would wait until we settled at a new support level, around $3.40 (see chart) before I start buying. However, since GST is already significantly oversold, this means we have a fair chance that we find support well before the $3.40 area and rally from there. Buy in increments and take profits in increments. That is my plan for GST, which maintains enough volatility to profit from, but doesn't attract enough fast moving volatility that it becomes overly complex to navigate. I always use stop losses too, in case trades do not work according to plan. I am anticipating it can fall towards the $3.40 area. That should give you an idea of where my specific pain tolerance will be. Put GST on your radar, we may see some very favorable pricing soon. See the annotated charts below for more detail.
As always, do your own homework to see if you agree. Good luck out there.
Disclosure: I am long GST.