The shares of Cove Energy (“COV”) present an interesting buying opportunity for the right investor. Clearly a speculative play, there reward potential is high, but significant volatility should be expected. The fundamental factors on the company are mixed, although intangibles are strong, and the technical picture offers some interesting insights. Overall, within the speculative space, COV is an attractive buy, but should not be a core holding of any but the most aggressive portfolios.
Fundamentally, the company’s interest in various wells coupled with the fact that it has already raised the capital needed to fund its current-year drilling is encouraging. The strategic locations of the wells – from offshore in Mozambique to Rovuma and Mnazi Bay – places them is well-diversified and potential critical areas. The strategic partnerships the company has developed, primarily with Anadarko, provides further evidence that COV is positioned to succeed. Lastly, the experience of the two top executives, one from Shell and one from Petrocelic international, are key. The pressures facing speculative plays like this require the skill of a stable hand at the helm.
Technically, the recent spike drove the stock into a severally overbought condition, but this has eased. What is particularly encouraging is that the stock was able to correct this condition without a massive sell-off in the stock. After spiking above 40, the shares have eased to 38. The corresponding decline in overbought readings has been more significant. Essentially the stock is well positioned to build on its own momentum and run significantly higher with the right catalyst. The stock is still significantly above its 50-day moving average, so potentially buyers should watch this relationship. Any close significantly below this moving average should be perceived as negative.
In general, the story supporting this stock, coupled with fundamental and technical factors, make it an attractive speculative bet with a solid risk to return profile.