The Only Way To Earn Triple-Digit Gains In Resource Stocks

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Here's some news that might come as a surprise to you...

If you look back over the past four years, the biggest winner in the energy sector is a company that I bought last September, Kodiak Oil & Gas (NYSE: KOG ) , a $2.3 billion oil and gas exploration and production company. Since January 2009, thestock has racked up a cumulativegain of 1,763%. 

Next up on the list is Concho Resources (NYSE: CXO ) , a $9.55 billion oil and gas exploration and production company with a whopping return of 312% in the past four years. 

In fact, 18 of the top 20 oil and gas performers over the past four years were small-cap producers. 

You have to look much lower down on the list to find the so-called supermajors. While smaller producers were doubling or tripling in value, ExxonMobil (NYSE: XOM ) eked out a 2.2% yearly return, ConocoPhillips (NYSE: COP ) inched up just 1.6%, and Total (NYSE: TOT ) actually lost ground. 

Really, though, it's not a fair contest. 

That's because these companies are all basically selling the same products at similar prices. And the easiest way to catch themarket 's attention is by growing production and reserves. So investorswill likely be much more interested in a company with a 100% surge in oil output than one with just a 10% surge.

I didn't exaggerate that growth-rate disparity for emphasis. If anything, it's even more pronounced in many cases.

For instance, take Statoil (NYSE: STO ) , a $78 billion company. The European giant managed to produce 2 million barrels of oil per day lastyear . That's an 8% increase from 2011 -- not bad considering the firm's core hunting grounds in the Norwegian Continental Shelf are in a state of gradual decline. 

Compare that with Magnum Hunter Resources (NYSE: MHR ) , a $679 million company, which is now pulling 18,500 barrels per day from hot spots like the Bakken Shale. That's a powerful 700%-plus increase since the beginning of 2011, when production stood at just 2,269 barrels per day. 

The choice is yours: 8% growth or 700%. 

No wondershares of Magnum have outrun Statoil by 148% to just 0.29% during the past five years. And there's no reason Magnum shouldn't extend that lead in 2013.

By the end of this year, Magnum Hunter's output is expected to expand by another 6,000 barrels per day. That incremental growth is enough to move the needle by 30%. To match that increase, Statoil would need to bring up 600,000 more barrels a day. 

That just isn't going to happen.

Clearly, math is on the side of the smaller producers. 

And if you want to make seriousmoney in energystocks (or in any sector of the market for that matter), you should, too. 

But there's an even bigger reason to focus on smaller producers -- one that has the potential to deliver near-triple-digitgains overnight.

Let me explain.

There are plenty of oil puddles capable of spitting out 6,000 barrels of crude per day. But small and even midsize discoveries won't do much for the Exxons of the world.

To move the needle in a meaningful way, they must tap into vast basins holding millions of recoverable barrels, such as those off the coast of Brazil. But those resource game-changers are rare. 

So if you're an oil giant faced with dwindling reserves and stagnant production, where do you turn for growth? 

The obvious solution is to buy and absorb the assets of a smaller peer that is sitting on oil-soakedreal estate .

This is yet another reason to own shares of the junior producers -- many are ripeacquisition targets. Look no further for evidence than McMoRan Exploration (NYSE: MMR ) , which attracted a buyer for its Gulf of Mexico assets a few months ago, giving stockholders a quick 87% gain overnight.

Fueled by mergers and acquisitions activity and driven by robust growth rates, it's no surprise that nimble energy producers routinely outperform their larger brethren. 

And this isn't just true for oil and gas producers. These samefactors are just as potent for small miners sitting on piles of gold, copper, platinum and other metals. 

Which companies will be tomorrow's stars? Nobody knows for sure, but all the evidence says they'll be the smaller producers that are just starting to expand and grow. 

Action to Take -->  That's why I'm focused on this space -- and you should be, too. Many of these stocks are unknown and off the radar, but not for long. 


-- Nathan Slaughter

P.S. I just discovered a tiny oil company sitting on a huge reserve. Recent estimates indicate there are billions of barrels underneath the surface, plus the company acquired 134,000 acres of this oil-rich land for dirt cheap. You can learn more about the details on this discovery and other recent developments here.

Nathan Slaughter does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of KOG, MMR in one or more of its "real money" portfolios.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , Commodities

Referenced Stocks: CXO , KOG , MHR , MMR

Nathan Slaughter

Nathan Slaughter

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