You may be forgiven for not knowing much about Afren, if you have not kept up with current events. The company is young, only founded in late 2004, and though it is listed on the London Stock Exchange, its operations are mainly in Africa. It is in the highly volatile oil and gas exploration business, and has the stated aim of becoming the largest African oil exploration and production company.
It plans to accomplish this by partnering with the native companies and governments, and also has ambitious plans to access substantial gas resources that are thought to be in the Gulf of Guinea. While Africa is the focus, with assets in Nigeria, Ghana, Côte d’Ivoire, South Africa, Kenya, and others, the company is also looking at the Middle East as a future source. It has the expertise to explore, evaluate, and develop through to production the energy sources that it finds.
It is interesting to note the politics that is playing out in connection with this company. Osman Shahenshah is a cofounder of the company, and he believes that Africa represents a safer option for oil and gas companies than even Britain. He points to various tax changes for the North Sea exploration, and that Africa has no similar arbitrary expropriations. In addition, he regards the banking issues in Europe as evidence of further troubling events.
Nigeria is cited as the major cash generator at the moment, with more than $1 billion of revenues in the last year. But Kurdistan represents a greater resource reserve for the future. The only downside so far is that some African workers have been taken hostage, though subsequently released. It seems this came from nationalistic demonstrations.
It must be said that the oil and gas industry stands in good stead for having large profits, despite any green opposition to the continued and increased use of fossil fuels. The problem as far as investment is concerned is that the industry runs on a “feast or famine” basis, at least when dealing with the earlier stages such as exploration. If there are no finds, then stocks are valued down because of the immense cost of exploration; but when oil or gas is struck, it is easy for stock valuations to rise dramatically, in line with the anticipated size of reservoir.
By taking a spread betting approach to oil and gas, you can be well placed to profit from the large moves that are commonly seen, while not sacrificing your capital in the event of unexciting results. It has been said many times, but needs emphasis, that the spread trader can just as easily take large profits from a down market as an up market.
The other point that needs emphasis is that you need to have a trading strategy which protects your capital, and allows you to close trades quickly when they go against you, while not limiting the better chances and taking you out of the bet before it shows its worth. For this you need to form and test your trading plan on the particular security, and make sure that you set suitable parameters for any indicators that you are using.
Spread Betting on Afren
Afren is in the oil and gas business, and this typically means that the share prices will be volatile. As Afren also develops resources as well as exploring for them, there is some moderation of the volatility, but you can expect to be kept on your toes by this stock. The current spread betting quote for the rolling daily bet is 131.17 – 131.83.
Considering first the case when you think that the price of the shares will rise in the next few days, you might want to place a long or buy bet for £20 per point. You should be careful not to over extend yourself, and watch for the price going the wrong way. Say all goes as planned, and the price goes up to 140.50 – 141.17. You can close the bet and this is how you would work out how much you won: –
- you opened your long or buy bet at a price of 131.83
- and closed it at the selling price of 140.50
- which means you have made 140.50 less 131.83 points
- or 8.67 points.
- You bet a total of £20 per point
- so multiplying 8.67x£20, you have won a total of £173.40 on this bet.
If the price had instead come down, you would have closed the trade for a loss. Say the price went down to 129.83 – 130.50 and you cut your losses.
- As before, you opened your long bet at 131.83.
- This time, you sold it at 129.83
- giving you a loss of 2.0 points.
- With a stake of £20 per point, you would have lost £40.
Perhaps at the beginning you took a bearish view on this company, and instead of placing a long bet you decided to bet £35 per point on a short or sell bet, which would be placed at the lower price of 131.17. If it works out, the price might go down to 123.21 – 123.88, and you can count your profit: –
- your short bet opened at 131.17,
- and closed at a price of 123.88.
- You won 131.17-123.88 points, which is 7.29 points.
- For your chosen stake of £35 per point, you have won £255.15.
Once again, the bet might have gone in the wrong direction, in this case upward, and you would be forced to make a decision to close the bet and cut your losses. Suppose you did this when it reached 132.75 – 133.38. You go through the same process to work out how much you lost: –
- Your short bet opened at 131.17,
- and closed at the buying price of 133.38.
- This means you lost 133.38 less 131.17 points.
- A total loss of 2.21 points.
- That means you lost £77.35.
One of the secrets to being profitable at spread betting, or indeed with any sort of financial trading, is to keep your losses small by quitting a position as soon as it is obvious it’s not working out.