PXP Energy Corporation: A Good Bet in a Bad Market?

PXP Energy Corporation (PXP) disclosed today that its Board of Directors already approved the subscription of Dennison Holdings Corporation of 340,000,000 common shares at a price of PHP 11.85 per share.

The figure is a 20 percent discount to the stock’s 90-day Volume Weighted Average Price. It is subject to a definitive subscription agreement.

Subscription by Philex

At the same time, the board also approved another subscription by Philex Mining Corporation (PX) to 260 million common shares under the same terms.

The proceeds from the said subscriptions are intended for:

  • the company’s exploration endeavors and other oil assets in Peru and the country
  • the company to repay its advances from Philex

PXP Energy Corporation’s Equity Interest

Post-transaction, Dennison will hold an ownership interest in PXP of 14.78 percent. On the other hand, Philex will control 19.76 percent of the company.

Financial Performance

PXP already released its 9-month financial performance with consolidated petroleum revenues totaled PHP 106.10 million. This figure is a 38.3 percent increase versus the recorded PHP 76.70 million a year ago.

The 38 percent rise in crude oil prices and the one percent rise in sales volume drove the stock’s good performance.

The company’s net loss totaled PHP 49.10 million. The amount is higher than the recorded PHP 34.3 million last year — driven by higher decommissioning and depletion cost.

Quantitative Data

3 Year Monthly EOD – PXP

3 Year Monthly EOD – PSEi

Summary

The mean average return of the PSE Index from the beginning of 2015 until October 2018 is at -0.24 percent. This figure is the average earnings one would have gotten by investing monthly in and out for the past three years.

On the other hand, PXP generated a positive mean of 5.75 percent. It means PXP would have given better returns compared to investing in the Index as a whole.

The compounded annual growth rate of the index is at negative 0.21 percent per month as evidenced by the lower closing versus the closing price in 2015. It means that if you invested in the index last 2015, you would have gotten no returns and even lost money in three years.

Consequently, PXP generated a compounded return of 2.69 percent per month. As such, PXP appears to have yielded better results than the PSEi.

PXP Energy Corporation showed higher values looking at the sample variance and standard deviation. These measures are a measure of risks. It means the stock is riskier compared to the index.

Meanwhile, the index is less risky and is more stable as its standard deviation is very low. It means that the spread among returns or the volatility in the index prices is not that far-away spread.

PSEi VS PXP

Since PXP is a stock, while the PSEi is a basket of stocks, we use the coefficient of variation.

The coefficient of variation measures the amount of risk (Standard Deviation) per unit of mean return.

PXP has a higher Coefficient of Variation, thus confirming that the stock has a higher level of risk.

Meanwhile, the Sharpe ratio measures the rewards per risk taken. In investing, one expects that the rewards are more than the risk.

In the case of the index, the reward is negative 0.70 per one percent of the risk. Simply put, it generates losses for every risk an investor makes. Thus, it is logical that it is not a worthwhile investment.

Don’t get us wrong. The data only covers the past three years. The index dropped for the past three years.

It confirms that it is not worthy to enter since you would have generated losses than actually gaining from the market.

Meanwhile, PXP generated a positive 0.96 percent return for every one percent risk taken. If you come to think of it, this is better than the index.

However, we would prefer a 2.00 or more Sharpe Ratio. Meaning, one has a 2 percent reward for every one percent downside risk.

Lastly, Beta is a huge negative number, which is equivalent to PXP and the index moving in opposite directions.

Having a substantial negative number means that PXP is a good bet in a declining market. It is expected that if the market goes down, PXP will go up. It is a hedge against downside risk.

Needless to say, PXP should be avoided when the main index starts going up.

Technical Analysis

PXP broke above immediate resistance today after consolidating for a few weeks. The moving averages aligned bullishly with the 15 EMA and 20 SMA as immediate support.

The volume supported the rally. MACD has made a bullish crossover. RSI is also bullish but is not yet at overbought levels.

Estimated support is at 16.94 followed by 16.05. Expected resistance is at 18.00 followed by 19.46.

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