By Michael Williams
Although it can be a complex and technical process, speculating on energy stock offers a unique opportunity with a resource that grows through cost management and successful exploration. This difference puts the industry in the position to develop without pouring millions into marketing, since the market controls the price of the commodity.
It can be helpful to a potential investor to look at oil and gas companies as being able to leverage their operating costs to increase their profits. Since the price per barrel of oil or million BTUs of natural gas is consistent with all manufacturers, those who can produce these resources at lower production costs are the best values. It is for reasons such as these that investors are speculating on energy stock like ATP Oil & Gas Corp (ATPG), Sandridge Energy Inc (NYSE:SD), Royale Energy Inc (NASDAQ:ROYL) and GMX Resources Inc. (GMXR).
Deciding How to Evaluate Energy Stock
There are a number of factors involved when selecting the optimum places to invest in the energy sector. Evaluating the efficiency of the company, its reserves, the management team, cash reserves and more can help an investor form the best decisions. A solid, well-run company is more likely to make significant profits than a weak one, and the share price of the stock will reflect its strength.
It is important to remember that the cost of production ($/BOE in the case of crude oil) should be lower for a company that is run well. The market rewards the companies that can build their reserves at the lowest cost. If a company can sell its oil or gas reserves for less than it cost to produce them, it is likely to be a strong investment option.
The quality of property a company controls can become another factor in deciding on an energy stock. Evaluating this key factor can be a big help in deciding whether to buy or not. If company has mineral rights on properties that are next to large, proven reserves, this can indicate the potential for a huge strike. Additionally, a company that owns or controls an extensive portfolio of properties offers them a greater chance of making discoveries during future exploration. The location of these properties is important; proximity to infrastructure such as pipelines, roads for transporting, treatment facilities and the like are critical in determining whether a company can stay competitive with its production costs. Finally, being familiar with the management team and the level of cash reserves it chooses to maintain is a good way to determine whether they will succeed going forward.
ATP Oil & Gas
Trading at less than a third of its 52-week high, ATP Oil & Gas is poised to go from a loss in 2011 to what many analysts see as a solid gain in 2012. Because the company is expected to have higher production from its wells in the Gulf of Mexico, the increase will favorably affect its reserves and margins.
Two key factors in considering a purchase of ATPG stock are found in the numbers. Over the past month, several insiders have made purchases, including a director who purchased 100,000 shares and the CEO who grabbed 65,000 more. In addition, many analysts note that the company is heavily shorted, and it is poised for a big rally should the company receive any positive news in the near future.
Sandridge Energy Inc
Carrying a hefty $2.93 billion market cap, this West Texas energy company is a mixed bag of possibilities for investors. Although its share price has been dropping, analysts are not trumpeting a quick climb. They have not grown too bearish on the company, but after being considered a strong buy just a couple of months ago, the consensus is to view SD as a hold.
After a steep drop in saw share prices fall to about half of its 52-week high. Analysts are reporting there is resistance between $7.50 and $8.00 per share, (it is currently just below $7.50) This is a belief that Sandridge starts trending upward when oil prices hit $105 per barrel, an attainable number for a price which has been hovering around $100 per barrel. If this stock can get traction, analysts believe there is very little resistance between $8 and $10, meaning that a 25% increase is possible. Until SD can break and hold its current resistance point, however, it’s probably better to sit tight.
Royale Energy Inc
Much like the real estate market, it’s “location, location, location” for successful oil and gas companies. This is definitely true for Royale Energy Inc. A steady producer who has realized an average annual growth of over 4% during the past five years, the company has picked up an amazing 100,000 acres of land during a recent lease sale on Alaska’s North Slope. A promising location for shale oil, this acquisition looks to be a prime target for repeatable drilling, lending to the belief that ROYL will enjoy a significant reserve growth for this property.
Investors are seeing this great news and responding. Trading at less than $2 per share as recently as October, 2011, ROYL stock has raced back to $5 per share, with a one-year target of almost $15. Prices are likely to climb quickly as news starts coming from this acquisition in the “heart of the oil window” of Alaska’s North Slope.
GMX Resources Inc
Another oil and gas company currently giving off mixed signals is GMX Resources Inc. This Oklahoma-based company enjoys some prime holdings in potentially profitable areas such as the Haynesville Formation as well as the Niobrara Formation. Since an August, 2011 sell-off, the share price has stayed between $2.60 per share and $1.30. With its current price sitting just about $1.50, it is considered undervalued, with the share price lagging behind its 50-day and 200-day moving averages, and also its book value of $3.41.
GMXR could be slow in responding as the company is currently facing a class-action lawsuit that was filed in the United States District Court for the Western District of Oklahoma. The lawsuit alleges that the company is guilty of material misrepresentation for stock offerings from July 2008, May 2009 and October 2009. While this case is still in its early stages, investors should be aware of its existence and status.
Energy Stocks – Picking a Winner
Finding a sure-fire pick among energy stocks can be tough. There are risks such as politics, environmental, volatility, litigation and much more. With so many pitfalls, it’s highly unlikely that any junior oil and gas stock bought today is going to be a company that is tomorrow’s Exxon (NYSE:XOM). That said, making smart decisions can help an investor find consistent winners among energy stocks.
By correctly analyzing a company’s efficiency, its reserves, the management team, and more, an investor can form the best decisions for buying and selling shares. Speculating on energy stock is a great idea for helping to round out a comprehensive investment portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.