Find Upside in PetroQuest

There has been much debate lately about crude oil prices, which have been nothing short of spectacular over the last three months. The trend remains up despite all the arguments about why the surge should end. We too are surprised at its resiliency. Sometimes, though, it's just best to keep it simple. For now, that means as long as prices trend higher, the path of least resistance is up. There is some concern that the upside strength in crude oil prices is waning here -- the domestic economy is struggling, and the continued weakness could affect the economies of emerging nations, posing a risk to oil demand. That scenario has not yet played out, but it is a risk and something to watch for.

There is no shortage of energy stocks that have strong technical setups, further evidence of the strong demand for anything in this sector. PetroQuest Energy (PQ - commentary - Cramer's Take) is one such stock.

PetroQuest, an energy and production firm based in Lafayette, La., decided in 2003 to slow down production of risky projects in the Gulf Coast and focus on inland areas. The company is concentrating on development in three general areas: East Texas, Woodford Shale in the Arkoma Basin of Oklahoma, and the Fayetteville Shale in Arkansas. By the end of the year, the company hopes to have 75% of reserves and 50% of production come from inland areas.

Thanks to higher gas prices, PetroQuest recently raised its drilling budget by $30 million, to $260 million. PetroQuest has more than 31,000 net acres in the Woodford Shale area, which has yielded successful leasing activity. In the first quarter, PetroQuest completed its 13th horizontal well. The company produces about 27 million cubic feet gas equivalent (mcfe) per day of Woodford gas. Despite PetroQuest's small size, it is one of the most influential companies in Woodford Shale. At Pelican Point in southeast Louisiana, PetroQuest found a substantial discovery in March, which should help the company have a breakout reserve year.

PetroQuest Energy (PQ)

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The technical configuration of PQ is constructive. The stock has had a strong push higher since breaking out in early March. From that point, the stock has climbed relentlessly higher, rallying 75% to the recent July high.

The stock recently had a bout of profit-taking during the general market weakness. We expect the stock to consolidate further, which in the long run will be constructive to support a further advance.

We would take advantage of further weakness to around $22 to $24 as an opportunity to establish long positions. We do not want to see a break of the $20 area and would use that as a trailing stop level.

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At the time of publication, John Hughes and Scott Maragioglio had no positions in the stocks mentioned. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.