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I’ve been bullish on oil for several years and have positioned my equity portfolio accordingly. And the past few years have been a bumpy ride. A financial crisis, a disaster in the Gulf of Mexico and now a European Sovereign debt disaster.

Today with oil creeping up on $100 and a portfolio of companies that can make oodles of cash at such lofty oil prices I should be tap dancing to the bank.

But I’m not. Because most of the oil producers that I own don’t even seem to be valued on the basis of oil being at $70, never mind $100.

Can someone please tell Mr. Market that oil is almost $100 so that I can make some money?

Have a look at the group of Canadian oil producers listed below. Over the past year the price of WTI crude is up 18% and as a group these stocks are down 34%. And that is with the majority of them significantly growing production.

29-Nov-11

29-Nov-10

Change

%

Nymex WTI Oil Price

$99.58

$84.10

$15.48

18.41%

Canadian Oil Sands (OTCQX:COSWF)

$19.40

$26.24

($6.84)

-26.07%

Midway (OTC:MELEF)

$2.99

$4.42

($1.43)

-32.35%

Pacific Rubiales (OTCPK:PEGFF)

$20.30

$32.02

($11.72)

-36.60%

Penn West (NYSE:PWE)

$16.05

$23.02

($6.97)

-30.28%

Petrobakken (PBKEF.PK)

$9.12

$20.49

($11.37)

-55.49%

Petrominerales (OTCPK:PMGLF)

$19.20

$32.72

($13.52)

-41.32%

Second Wave Petroleum (OTC:SCSZF)

$2.13

$2.77

($0.64)

-23.10%

Talisman (NYSE:TLM)

$12.66

$19.53

($6.87)

-35.18%

Nexen (NXY)

$16.02

$21.63

($5.61)

-25.94%

Average Decrease in Share Price

-34.04%

I’m a Frustrated Investor – Here are the Reasons Why

Frustration Number 1 – The Price of Oil

I made a conscious decision to get long light oil producers because I thought 2011 and 2012 were likely going to be years of ever escalating oil prices. So far I’ve been exactly correct as oil has risen from the $70s and $80s to near $100 today. All that I have to show for it in my portfolio is a bunch of paper losses.

Frustration Number 2 – Growing Production

If oil prices increased and production stayed flat one might conclude that valuations of oil companies would likely increase due to the increase in cash flow resulting from rise in oil. These companies that I own haven’t just benefitted from the price of oil increasing, they are also producing more of it. Better prices and more production. That shouldn’t result in large share price declines. But it has.

Frustration Number 3 – Hasn’t Mr. Market Noticed the Upheaval in the Mideast?

I specifically selected the companies I own not just for their weighting towards light oil and their ability to grow production, but also because they are situated in the friendly operating environment of Western Canada. A safe political environment and no hurricanes. You can add to my list of frustrations the fact that my companies are not receiving any sort of premium for the fact that they are not in areas of the world where there is political upheaval (Egypt, Yemen, Syria, etc). Egypt is still a mess, Yemen is downright scary, Syria is even worse. Shouldn’t oil reserves that are right next door to the world’s largest oil consumer get more love?

Frustration Number 4 – The Threat of Iran Conflict Has Increased

This frustration is similar to number 3, but relates to an even bigger issue. With the recent UN report on Iran’s nuclear weapon chase elevating the likelihood of military action against the country, safe oil reserves should be sought after by everyone. An attack on Iran creates the very real potential compromise of the 16 million barrels of oil that flows through the Strait of Hormuz every day. I couldn’t even hazard a guess as to what might happen to the price of oil should this passage by choked off.

Frustration Number 5 – Merger and Acquisition Activity Shows Undervaluation of the Sector

There have been several transactions within the oil industry that have provided excellent metrics for me to use in valuing my portfolio companies. Two recent examples are the Sinopec acquisition of Daylight Energy and the Statoil acquisition of Brigham Exploration. Both of these deals were done at multiples per flowing barrel and cash flow, as well as dollars per acre of land that strongly support what I think my portfolio companies are worth. Mr. Market seems to have paid no attention to the fact that Daylight for example was taken out for twice the recent stock price. I would have expected that kind of premium to get some attention for other companies operating in the same region.

Frustrated, But Still Focused on Intrinsic Value

I feel like as an investor the decisions I’ve made over the past twelve months have been exactly correct. I’m long the commodity I want to be long. My companies are hitting or exceeding their production targets. Yet I’ve been beaten about the ears by Mr. Market.

All I can do at a time like this is turn to Buffett for wisdom:

- “We don't get paid for activity, just for being right. As to how long we'll wait, we'll wait indefinitely. “

- “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

- “The stock market is designed to transfer money from the active to the patient.”

- “You're neither right nor wrong because other people agree with you. You're right because your facts are right and your reasoning is right, and that's the only thing that makes you right. And if your facts and reasoning are right, you don't have to worry about anybody else. “

I’m still averaging down on various unconventional Canadian light oil producers as cash comes in the door. If you haven’t had a look at this sector I encourage that you do so as I believe that there is serious disconnect between what another oil company would pay for many of these companies and what Mr. Market thinks they are worth.

When will I get rewarded for my investments in this area? I have no idea, but eventually Mr. Market will get the valuations right if oil stays elevated.

Source: 8 Oil Stocks That Don't Seem To Realize Oil Is Selling For $99