Monday, March 7, 2011

Audacious stock promoters or gungslinger day-traders

Lucas Energy is a small cap company which appears to be honest but surrounds itself with shady characters.  The company buys shut-in and otherwise exhausted oil wells and rehabilitates them – a classic Ben Graham cigar puff play.  The wells may be cheap – and maybe you only get one puff before they finally give up the ghost – but because you picked the cigar butt off the ground the return on equity is adequate.

The company adds a little spice to the returns by cutting in various penny stock companies on wells.  (See for example Savoy Energy - now sub 1c - who uses Lucas Energy as an operator.)

The penny-operators pay good money for lousy (but producing) properties and the stock promoters thus announce their production numbers.  No mention of course that these are the last puffs on a cheap cigar – but hey at least these penny-stock promotes are real producers unlike some I have blogged about from time to time.

And besides you can't knock Lucas energy for selling overpriced cigar-butts.  After all Lucas Energy is in the business of trading in exhausted oil wells and if someone wants to buy a share in one why should Lucas stand in their way?  The motives of the buyers are not Lucas Energy's business.

What is however perplexing is the sudden trading in Lucas Energy shares.  Lucas is Amex listed and used to trade 100 to 300 thousand two dollar shares a night.  This was generous turnover for 16.6 million shares outstanding and a fair whack of those locked up in the hands of management.  I never quite understand why the float of the company needs to turn over ever 50-70 days however this turnover is high – but not unusually so.

Suddenly the market view of Lucas changed.  The precursor was a press release stating that a well in the Eagle Ford trend was finished and they expected it to flow at 500 barrels of oil per day.  This is a fractured well and like most fractured wells should have a large initial flow with a rapid decline rate.  More to the point Lucas only has a 15 percent interest in this well (and a similar interest in another soon to be drilled well).  These are valuable assets but they are not huge assets.  (The value of course being dependent on the decline rate which you would expect to be high - but is at the moment unknown.)

But that is not what the stock market thinks.  Lucas has traded from a low of below $2 in late February to a high above $4.50 on Friday.  More to the point the volume has gone ballistic – 800 thousand followed by 20.7 million, 10.6 million and 25.5 million shares.  The average holding period of the float is now under a day.  These are large numbers as the trading float is probably below 10 million shares.

We could be in the world of hyper-trigger day-traders – but I would be surprised if a single one of my readers knew what Lucas Energy was.  Yet the market sees fit to make this - of all things - one of the most actively turned over stocks since the height of the dot-com-day trader bubble (turnover being measured relative to float not in absolute dollars).

What if anything rational explains turning over float quite this fast?

I see two hypotheses – and I don't know how to pick them apart.  One is that there really are a bunch of gunslinger day-traders (or their computers) here and that all-of-a-sudden they see the reason to trade the entire float of this company more than three times in as many days.

The alternative is that this is a pump-the-volume and see if you can attract suckers story.  The suckers of course could include the gunslinger day-traders.

I can't tell – but the SEC has the power to tell – and when a stock with long associations with penny-stock hucksters has volume like that I can't imagine why the SEC are not looking.  If the stocks are doing round-trips amongst a few players faking volumes then a prosecution should be easy. If however day-traders are really behind it then they are even more removed from economic reality than I thought.  (Day traders like this in energy stocks look a little like day traders in tech stocks in 1999.  Not the top - but certainly a reason for thought...)

I just look in wonder.  There is no model I know where turning over the stock of a company three times in three days is a productive way to allocate capital.  But hey – that is just the stock market – and despite doing this for years I still find stuff like this strange.



Robert in Chicago said...

Without naming names, I have been watching other penny stocks with similar volume and price spikes. This one does not look any different from the others. Many, but not all or even a majority of them, have been energy companies. Either there is a broader market point to be made, or there is no point to be made. I don't have enough market experience to know whether the broader point is new or as old as the markets themselves.

John Hempton said...

Well apart from some small cap energy stocks being outrageously hot stocks I don't know either.

But suddenly turning the float over 5 times in 3 days. that is strange - and more than just an ordinary "volume spike".


Diss Cerna said...

One would think the Fort Worth SEC office may have interest considering the fact Mesa Energy (MSEH) received a subpoena from them last May. Mr. James Cerna (large investor in MSEH) is a director at Lucas Energy.

Yes, there are other micro-cap oil & gas issuers seeing the same thing (volume/price spikes) but not at this pace (1.8 times the shares outstanding on Friday).

Alex Sebastian said...

Would you be so kind as to explain to the less-informed readers what "a classic Ben Graham cigar-puff play" is?


Anonymous said...

I think the answer is a little bit of both. Lucas (LEI) surrounds itself with promoters of the lowest order, like Donald Baillargeon. A quick search of the MoneyTV host found this:

The Complaint alleged that from January 1, 1996 through November 26, 1996, Norman and Baillargeon engaged in various fraudulent acts that resulted, among other things, in the manipulation of the price of the common stock of Alliance, a financially troubled company engaged in housing development and construction. According to the Complaint, Norman and Baillargeon made false and misleading representations concerning Alliance's cultivation and sale of fast-growing "paulownia" trees, its breeding and selling of live goats and carcasses, and its development of a nationwide chain of chiropractic franchise clinics, among other matters.

He has promoted such winners in the past as Universal Express (USPX) and Imaging3 (IMGG) among others.

Any company associating with him and using his touting services immediately goes into my short pile.

Another interesting oil name that has exploded in price and volume is Samson (SSN on the ASX and also on the scAMEX). Perth based company but its operations are in Wyoming. You don't see that everyday. Might be worth an examination too.

Jonathan K said...

I'll go with the latter. I haven't seen much promotional activity with this stock. Last Tuesday, no one wanted it at $2. Then oil smallcap fever spread from garbage like BDCO and ROYL to LEI and it was off to the races.

I would also note that Lucas is in the Eagle Ford, one of the hottest plays in North America. An independent evaluation put PV10 at north of $50mm last year and Lucas provided a revised internal estimate of $83mm back in November.

These small oil stocks deserve a discount since operating margin is easily swallowed up by G&A. But Lucas seems to have some assets of value even if they don't seem impressive on a well-by-well basis.

Alas, I was long at $2 and sold far too early.

Vitautas said...

At the moment another +17%!
This stock is overpriced (only two million barrels of oil reserves but a market cap of ca. 80m$), but very dangerous to short!
At the moment I don't know when to enter a short position...

Anonymous said...

I bought at last week $2.50 and it now has since doubled. I'm tempted to sell while it's still within $4 this week. Your thoughts?

John Hempton said...

To anon who purchased at $2.50. You are a better trader than me.

You should know when to sell.


PS. Stock turned over more than 100 percent of the float today as well.

if you held it since last week then you are not an active trader.


Anonymous said...

Lucas Energy Inc. is Today's Focus Stock on
6:50 AM ET 3/7/11 |
GlobeNewswire announces an investment report featuring Lucas Energy Inc. (AMEX:LEI). The report includes financial, comparative and investment analyses, and industry information you need to know to make an educated investment decision.

The full report is available at:

Lucas Energy Inc. (LEI) is an independent oil and gas company with approximately 12,500 gross acres (10,400 acres net) of oil and gas leases in South Texas, primarily in the Gonzales County and Wilson County, Texas. The Company is engaged in the exploration and production of oil and natural gas. It holds oil and gas interests in the Austin Chalk formation, Buda formation and Eagle Ford Shale formation. As of March 31, 2010, LEI operated 30 wells that produced approximately 190-200 barrels of oil per day (BOPD) gross. During the fiscal year ended March 31, 2010 (fiscal 2010), its oil production sales totaled 27,833 barrel of oil equivalent.

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In the report, the analyst notes:

"LEI last week reported that its Hagen EF No.2H Eagle Ford horizontal well being operated by Hilcorp Energy Company has been fracture stimulated, completed and tested ... The Company expects the well to meet or exceed expectations of 500 barrels of oil per day (BOPD) IP (initial test potential) and increase the Company's net production, cash flow from producing wells, and net proved producing reserves, significantly."

"LEI recorded a new 52-week high of $4.59 Friday before closing the session at $4.24. The stock saw trading at a volume of over 25.67 million shares compared to its average daily trading volume of 228.30K shares. LEI remains above its 50-day moving average of $2.24 and its 200-day moving average of $2.06."

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dd said...

Would you be so kind as to explain to the less-informed readers what "a classic Ben Graham cigar-puff play"

The analogy's half-explained in the post; it was used by Graham in discussing the analysis of ex-growth businesses and depreciating assets (like spent oil fields). The idea is that if you were buying cigars at full price, you want a full cigar, but if you find a cigar butt in the street then even if there are only one or two puffs left in it, your ROI is still large because your base cost was so low.

It's an example from the 30s. It hasn't really translated all that well to an era in which people don't pick up dog-ends in the street

John Hempton said...

Cigar butt stocks: Ben Graham (and later early Warren Buffett) used to buy bad businesses at VERY LOW prices.... often less than their net working capital.

When you buy a business that cheap you usually make a profit NO MATTER HOW BAD THE BUSINESS...

The analogy is that if you pick up cigar butts in the street and have a puff its a cheap puff. It may not be a great cigar - but hey it is free...


NotATeabagger said...

Looks like the same thing that happened to tiny, ultra beaten down regional banks last year right before the flash crash. you would see a lot of small/micro regional banks tear it up ahead of the economy.

looks like the same thing now with energy given the oil stuff going on. Oil is hot so go for the heaviest beta plays around.

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