Stock #2 - HDY - Hyperdynamics Corpration - 1 year return = 603% (1/10/2011)

Stock #2 - HDY - Hyperdynamics Corporation - Energy - Oil Drilling

If a name ever fit a stock, this may be it. The stock is as “hyper” as the name implies.






This stock, similar to CPWM, bottomed in early 2009 with the market, after a two-year decline. The stock had been stuck below $4 since 2000. The stock bottomed at about 25 cents a share after a two-year decline. If you zoom out you would see that the two year decline was actually part of the stock’s 10-year range between 25 cents and $4 that was not broken until late 2010.

After rallying off the bottom to about $2 in September 2009, the stock built a huge base between around 90 cents and $2 for a year into the end of August 2010. The company’s hopes were pinned on an oil field off the coast of Africa which had not had a single barrel of oil drilled yet. The company had zero revenue for their fiscal years 6/2009 and 6/2010 and had net losses as far back as the eye could see. No analyst estimates, no coverage. Neglected stock.

In early September 2010, the company announced estimated figures of 2.3B barrels of oil being in the oilfield that they have large interest in, and said it expected to spud (drill) the well by 2011 year-end (not sure if they meant fiscal or calendar year). This news release sparked a rally from just over $1 to $2, the top of the one-year range, within 2 days. The stock then drifted up in consolidation for about 12-13 days, pressing against the top of the one year range at $2 area. Then we get the following breakouts in the latter part of 2010:

9/28/2010 – The company released their 10K management discussion, where they point out that the zero revenue for last two years was due to focus on interpretation of seismic data from the well. It isn’t clear what the catalyst was in the 10K, but the stock finally broke out of the one-year range on high volume that day, and was up 25% for the day. However, there was no immediate follow through after the single day, and the stock went sideways for next 6 days on lower volume.

10/7/2010 – The stock broke out of the 6-day range at $2.50 and rallied for 7 trading days for a 40% gain to the $3.50 area. The stock fell swiftly for 2 weeks after issues with their audit report, but found a floor and established a 4-week tight base around $3-$3.50. This takes us to mid-December with the stock still in the base.

12/16/2010 – After an investor’s call where the company announced a farm out of a portion of the well, the stock broke out through $3.50 in the morning but gave up all its gains same day at the old $4 resistance from 2007. But the stock reversed upward next day and rallied through $4 to $5.40 in 4 days, a gain of 35% from the high of the failed breakout day. The stock then formed a small range pull back along its short-term averages for about 7 days.

1/6/2011 - No news as far as I can tell. But the stock broke through the $5.40 pivot point and out of the 7-day pull back. The stock ended up 14% on the day and as of 1/13/2011 is at $7.40, a gain from the breakout point of 37%. We’ll see how far it goes before pulling back, but this is the third breakout that resulted in a 35% + rally in last 4 months and doesn’t show signs of slowing down…yet.

The December 2010 and January 2011 breakouts alone and rally to date (1/13/2011) adds up to a gain of 85% once the price got through $4. Looking at the weekly chart, you can see that we had a rally off the bottom in 2009, then a year-long base into Q4 2010. The stock broke through that year-long base on the early October 2010 breakout, formed a base in Nov/Dec, and then broke out on huge volume. So we are in the second leg of the move out of that year-long base.

Other notes about the fundamentals and technicals:

- The stock bottomed out at less than $1 per share after a 2-year decline from $4 to about 25.
- The stock made 2 very large moves: the first after breaking out of a year-long range in early October (about 100% move), and the second after a 4-week tight base (85% and counting).
- The company’s fundamentals are almost not even worth mentioning, other than the fact that they have not made squat. They have lost money every year. Their revenue hopes appear to be reliant on a well that is yet to be drilled.
- At the same time, the upcoming drilling of the well is probably the single catalyst for this stock, other than oil prices being on the rise. So the macro environment is good for them and they have a source of revenue around the corner. It is merely a question of how long they can finance operations with zero sales for last 2 fiscal years before that well is drilled.
- The stock has no analyst coverage and has no estimates or ratings…this has been true for long period of time.
- Next earnings likely mid-February.
- Stock has had zero quarters of increasing fund ownership as of 1/2011.
- IBD/EPS/RS ratings were: August 2010: 40/25/88; December: 31/46/70; January: 73/12/99. Note that the earnings rating meant nothing and stock had 88 RS rating well before the Sept-Jan breakouts. Also note that the RS rating dropped to 70 at the end of the 2-month base in Oct-Dec. Currently the stock has RS = 99.
- The energy sector has been in favor since the summer with oil prices on the rise. Other stocks in same Sub-Industry have done well also – MHR AREX FXEN KOG SSN…about 10% of the stocks in that sub-industry were up 100% or more in the last 1 year.
- However, this story appears to also be about the company finally getting some revenue while oil prices are high. A lot of these exploration stocks seem to depend on their specific natural resources and what they can get out of the ground, all else being equal.
- Short interest was about 3% last two months but the change in float late in 2010 may affect that calculation.
- The stock had negative ROI, Margins. P/E was negative and d/e was over 0.5.Main problem was getting revenue from this well off the Africa coast.
- Float is 100M, but they did a private placement in 2010 that increased that by large amount.
- The insider buying was actually a point of note here – two big purchases took place by a director and the board chairman in February and May/June for a total of about 478,000 shares. These purchases took placed during the 1-year base in 2010.
- Dollar volumes on the breakouts were $2M (9/7/10); 4.5M (9/28/10); 5M (10/7/10), 14M (12/16/10), and 15M (1/6/10). Note the spike on the December breakout when the stock hit $4. Stayed high on January breakout, the second breakout after a 2-month base.
- Trend Intensity on the breakouts were above 105 each time: 9/7 111; 9/28 160; 10/7 172; 12/16 117; 1/6 155. Note each time a base formed for long period the TI fell back to 110-120 range. For example the 2-month base in late 2010 ended with a TI of 117.

Summary: Why did HDY move up by 200% or more in a year?

1. This company has essentially been in startup mode since 2000, where it began a 10-year range between 25 cents and $4. Like many companies in startup mode, the light at the end of the operating loss tunnel shines before the end of the tunnel is actually reached. So this stock’s move appears to be mostly based on the expectation for large amounts of revenue from the well off the Africa coast, which could take the company from a decade long loser to actual cash flow. Since the stock has never experienced making money, that can be a pivotal point in the future prospects for the stock as well as the company. It appears that the expectation of that time has money flowing into the stock.
2. As with any company in the oil industry, regulatory and economic factors have to be considered as well. Increasing oil prices at the same time the company is on the cusp of drilling this well appears to be as good a timing as they could ask for. The quirk with drillers is that they are all very different in the amount of resources they have and how they operate, so company specifics in this group can cause massive underperformance when the macro environment is favorable.

Looking at this stock without knowing the industry or time in history, I would have thought I was looking at a dot com stock in 1999. The zero revenue for 2 years on a stock spiking on hopes of revenue/earnings down the road sounded a lot like those days from what I remember. So this appears to be a stock that started as speculative and as the pivotal point approaches the stock is trying to price it in. It will be interesting to see how this stock’s momentum unfolds.

Anything I missed…let me know.