eshum sez: 'The funds that are driving the ASX oil and gas...

eshum sez: 'The funds that are driving the ASX oil and gas sector are in no mood to buy yet. IMO we will have to wait for a more pivotal event to get those fund manager slow learners to turn the ship around. A good fast break above $50 for WTI would probably do the trick. Just need a bit of patience. It will come. Sentiment in the shale oil patch is turning down very fast now and it won't be long before the price of oil follows up.'

DSD: No doubt most funds esp larger players are gun shy re energy stks and esp small players like DLS with a mktcap of 228m. But one big advantage DLS has is high liquidity allowing traders to buy/sell chunks of 50k each trade. Yesterday just under 3m shares traded.

So will funds that specialise in small-med cap stks come back into DLS? It depends largely on what happens to POO. If they reckon Brent can rise from today's $50 to $60 over next 6-8 months they'll start dipping toe in the water. But this presents an opportunity for the small guy with a strong stomach. A $10 rise is not just a price increase of 20% generating 20% gain in revenue. It is usually a 60-100% increase in margin! And margins drive earnings/profits.

Lets say company A produce oil C1 cost of $30/barrel. Fixed overheads etc of $10 make total cost of producing each barrel $40. Here's what happens:

When oil is $45 they make 12.5% margin.
When oil is $50 they make 25% margin.
When oil is $55 they make 37.5% margin.
When oil is $60 they make 50% margin.
If oil hits $70 then the roof blows off.

Hence, the leverage affect is massive. Never underestimate it. Low oil prices over the past 8 months has seen exploration almost dry up. Plus projects already drawn up have been postponed and many will not enter construction till POO exceeds $75. Afterall they were designed/planned 18 months ago when poo was over $100. They are simply not viable at current POO.

Tuesday night (USA) WTI rose from $44.10 to $44.90 = 2%. Tuesday DLS SP fell to 48.5c.
Wed night (USA) WTI rose from $44.90 to $47.15 = 5%. Wed DLS SP up to 49.5c =2.06%.
Thursday trade opens in 2 hrs after POO has risen 7% in just 2 days!
Use the leverage effect explained above and make yr own decision re DLS SP today. Currently POO up another 25c live off-mkt trading.

Should enough traders be willing to take a long position in the pre-open queue then short sellers will jam the exit as they try to escape together. This is not Woodside. This company is one 50th of Woodside. When folk flee the action it too acts as a lever on SP. What they are hoping is nobody will notice the big jump in POO and to quietly exit at today's open. I'll be watching with interest. IF their bid is too low and they miss the open then they'll be foced to buy back at higher price. The effect snowsballs of its own volition. Just needs one fund manager to decide to buy 200k of DLS at the open and the SP will fly.

Montgomery and Clime are both conservative/cautious analysts. They see little current value in the ASX. They have Fy16 IV re DLS of 66c and 62c respectively. That's 33% and 25% respectively. Good enough for me.