Do you want to make a lot of money investing in commodities?
Then oil and gas producers are a great place to start. But odds
are, you're probably not going to do it with global behemoths like
Don't get me wrong, these are both fine, well-managed businesses.
They're arguably two of the most successful integrated oil and gas
companies in the world. And they've rewarded stockholders well over
the past couple decades. But yesterday's gains don't do today's
investors any good.
I'm betting that Chevron and Exxon will have a harder time
delivering outsized gains going forward. Because it's tough to
fight against thelaw of large numbers -- and these companies are on
the wrong side of it.
Chevron and Exxon each produce more than 2 million barrels of oil a
day. When you're already pulling in that much oil, it's a challenge
to maintain the same level of production -- let alone grow it. In
fact, both firms reported a modest decline in output last quarter
compared to the same quarter a year ago.
Believe me, it's not for a lack of looking. Exxon single-handedly
shelled out $9.3 billion in capital expenditures last quarter and
plans to spend $37 billion on exploration and development for all
of 2012. Some of those investments will result in new discoveries,
but every barrel will be needed just to offset normal production
declines at older mature fields.
Even if the company succeeds in boosting daily production by 50,000
barrels per day (no small feat), that would only result in a tepid
2% increase. By contrast, developing new sources and pulling up an
extra 50,000 barrels per day might boost production rates 100% or
more for smaller producers.
Racy production growth seldom goes unrewarded in themarket . That's
why the market's list of biggest winners is usually dominated by
future stars like
Gulfport Energy (Nasdaq:
Gulfport is an independent oil and gas producer with a $1.5
billionmarket cap -- roughly 100 times smaller than oil behemoths
like Chevron and Exxon. The company's primary operations are
focused along the Louisiana Gulf coast and the Permian Basin of
West Texas, although it's actively hunting for oil in exciting new
places like Ohio's Utica Shale.
One year ago, Gulfport's wells spit out approximately 6,200 barrels
of oil and gas per day. As of last quarter, the company is now
producing nearly 7,300 barrels per day. That's an increase of 1,100
barrels per day, 99,000 per quarter, and 400,000 per year.
While an increase of 100,000 barrels per quarter would be a drop in
the bucket to oil majors like Chevron and Exxon, it represents a
healthy 17% increase for Gulfport. That stronger productvolume
pushed the firm's revenues up 19% for the quarter to $66 million --
$3 million aboveWall Street 's target.
That superior growth helps explain why GPOR has been a standout in
the energy sector and one of the market's shining stars. The stock
has delivered an impressive 64% return over the past two months and
surged 247% over the past three years.
That's why I steer my readers to small, independent producers.
Unlike the big boys, it doesn't take a world-class discovery to
move the production and reserve needles -- even small oil puddles
can be converted into big paydays.
Of course, risk and reward usually go hand in hand. Smaller
producers might have shakier balance sheets and less access to
capital for expansion. They can also be more sensitive tocommodity
price fluctuations. But if you want to capture truly explosive
gains, you have to withstand some volatility.
Action to Take -->
Anything can happen in a day or a week. But over time, the giants
will have trouble keeping pace with nimble companies like Gulfport.
When you're less than 1% of their size, it's much easier to grow
production, expand reserves, and swiftly raise profits.
-- Nathan Slaughter
P.S. -- If you've been looking to add resource stocks to your
portfolio, now may be the time. The global trend for commodities is
rising demand coupled with shrinking supplies. That's why we've
seen soaring prices for years... and it means short-term sell-offs
can be rare buying opportunities. To learn more about Scarcity
& Real Wealth, which focuses solely on the market's best
resource investments, visit this link (without watching any
Nathan Slaughter does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of XOM in one or more if its "real money" portfolios.