The ASX lists two globally significant oil and gas producers – Woodside and Oilsearch. While their assets are in different parts of the Asia Pacific region they have a key common factor – extensive gas reserves. Over the last year, Woodside has underperformed as a new CEO “cleared the decks”, delaying projects. The underperformance is clearly illustrated by the snapshot from the Tracker platform’s portfolio mixer:
Traders who view this news as largely factored in to current prices may be expecting Woodside to regain lost ground against Oilsearch, especially as Oilsearch is years away from full production. A one month analysis suggests yesterday’s closing prices are at a recent extreme:
Traders entering a pairs trade are likely to lean towards a value neutral position – selling the same dollar amount of Oilsearch as purchased in Woodside. At yesterday’s closing prices, the ratio is:
$34.22 / $6.95 = 4.92
Many traders will round this ratio to 5:1, suggesting the following trade:
BUY 2,000 Woodside, SELL 10,000 Oilsearch at or near $34.22 and $6.95 respectively.
To read more on Pairs Trading methodology, click here: