What Are The Drivers Of Lansdowne Oil & Gas plc's (LON:LOGP) Risks?

For Lansdowne Oil & Gas plc’s (AIM:LOGP) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. Generally, an investor should consider two types of risk that impact the market value of LOGP. The first risk to consider is company-specific, which can be diversified away when you invest in other companies in the same industry as LOGP, because it is rare that an entire industry collapses at once. The other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.

Not every stock is exposed to the same level of market risk. A widely-used metric to measure a stock's market risk is beta, and the broad market index represents a beta value of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.

What is LOGP’s market risk?

With a beta of 2.44, Lansdowne Oil & Gas is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. According to this value of beta, LOGP can help magnify your portfolio return, especially if it is predominantly made up of low-beta stocks. If the market is going up, a higher exposure to the upside from a high-beta stock can push up your portfolio return.

Could LOGP's size and industry cause it to be more volatile?

LOGP, with its market capitalisation of UK£6.76M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Furthermore, the company operates in the oil and gas industry, which has been found to have high sensitivity to market-wide shocks. As a result, we should expect higher beta for small-cap stocks in a cyclical industry compared to larger stocks in a defensive industry. This is consistent with LOGP’s individual beta value we discussed above.

Is LOGP's cost structure indicative of a high beta?

During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I test LOGP’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets is virtually non-existent in LOGP's operations, it has low dependency on fixed costs to generate revenue. Thus, we can expect LOGP to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. This outcome contradicts LOGP’s current beta value which indicates an above-average volatility.

What this means for you:

You could reap the gains of LOGP's returns in times of an economic boom. However, during a downturn, a more defensive stock can cushion the impact of this risk. Depending on the composition of your portfolio, high-beta stocks such as LOGP is valuable to pump up your returns, in particular, during times of economic growth. In order to fully understand whether LOGP is a good investment for you, we also need to consider important company-specific fundamentals such as Lansdowne Oil & Gas’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:

1. Financial Health: Is LOGP’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
2. Past Track Record: Has LOGP been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of LOGP's historicals for more clarity.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.