Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of Approach Resources (NASDAQ:AREX) climbed as high as 10% today after the company announced pretty impressive operational numbers for the full year 2014. The company couldn't hold onto those gains, though. Probably because investors realized that it didn't publish any data on financial results.
So What: With oil as low as it has been lately, it doesn't take much upward movement in the price of oil to get a company's stock like Approach's to pop more than 10% in a day. It's a small scale oil and gas producer that only has a few -- but lucrative -- positions in the Permian Basin. While seeing the company increase its production by more than 45% in 2014 -- more than management guided for the year -- we have to take operational results with a big grain of salt because it might not be indicative of the company's financial performance.
Sure the company has some of the lowest drilling and lease operating costs in the Permian, but when the company's internal rate of return at $70 per barrel of oil is less than 10% for some wells, oil prices in the $50 range will likely keep investors scared.
Now What: Any money invested in a smaller independent oil and gas producer today is a high risk/high reward bet. Fortunately, for Approach, it has a decent asset base to work from, impressive operational results, and a decent but not great balance sheet -- which is more than what many companies in this space can say today. That being said, it's probably best to stay on the sidelines with this company until we get a clearer picture as to how low oil prices will impact its finances and balance sheet.