Time to Buy Oil and Gas Exploration Companies


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Right now I believe you have the opportunity to make multiples on your original investment by buying micro-cap oil and gas exploration companies.

Given the market's recent strength I realize I may sound like a market cheerleader - but I'm not. I believe there are huge opportunities in emerging markets for companies, and investors, that have the chutzspah to go after remote oil and gas reserves.

The sky is the limit for exploration companies active in developing markets - if they strike oil and natural gas reserves...

In the developing world, the risks are greater. Political unrest and corruption make discovery and drilling an uncertainty at best. Unclear claims and drilling rights on tracts of land can lead to legal disputes, and lack of modern technologies mean progress can be slow when drilling finally begins.

But the rewards can be great, and the strikes can be huge. Untapped Spindletop-type reserves do exist, and shareholders of companies that find them have the potential for hundreds, and even thousands of percentage point gains.

If you've never heard of Spindletop it's time you learn the story. In 1901 the Texas oil strike changed America forever. Spindletop would become the most productive oil field the world had ever seen, producing over 150 million barrels to date, and would give rise to the Texas Oil Boom.

The oilfield gave the country a stable supply of energy. Household names like Gulf Oil, Texaco, Chevron ( CVX ) , and Exxon Mobil ( XOM ) , all got their start at Spindletop.

The well pictured to the right, known as the Lucas geyser, was the first big hit of the Spindletop oilfield and shot over 100,000 barrels of oil a day into the Texas sky for 9 straight days before being capped.

***Early oil and gas explores, like those that tapped the Spindletop oil fields, didn't sit on their hands when their native country was planning for the next stages of growth - or positioning to endure the potential for hardship. They went out and did something to ensure that there would be opportunities to pursue, no matter what sequence of events came to pass.

Right now you need to think like these explorers when deciding how next to invest. Shrug off fears of what could, or might, happen. Instead focus on creating opportunities for growth and profit. Then act accordingly and protect yourself from the downside risks that you see on the horizon.

***Right now, oil prices are zeroing in on the $100 a barrel mark after rising steadily for two years. The current price of around $90 a barrel should be an indication that global growth has resumed, and that the true picture of energy demand is becoming clearer once again.

The ten year chart of oil prices below indicates to me that in the near-term oil could trade in the $100 to $120 range and still be well within a 'reasonable' technical range. Erase the massive spike and decline between 2007 and 2009 and you'll see that prices are simply resuming their steady upward climb that began in 2002.

In other words, the clouds of the recession are beginning to part. The thing about these pesky clouds is that they made most people focus only on what they could see right in front of them. They forget about what lies just out of sight - the inevitability of higher oil prices.

Not so for explorers. Even though they couldn't see past the clouds, they knew that $40, $50, or $60 oil didn't accurately represent what the world was willing to pay for the greatest energy producing commodity in history.

They sensed that there was opportunity out there, and they kept exploring. But nobody was buying shares in their companies.

Now, their shares are being snapped up. Many that I monitor are up 20 percent or more in the last month. That might sound like a lot, but in this segment of the market it's not. These stocks can swing 20 percent or more in a single day. But right now I see a lot more buying than selling, and I believe the upward potential is huge for the right oil and gas exploration investments.

Right now, you can invest alongside these explorers and position yourself to take advantage of the inevitability of higher oil prices.

However you, unlike the explorers, don't have to upend your life, take on undue risk, or otherwise change the happenings of your everyday existence. As a small cap stock explorer you just need to do your research, put in a stock order, and monitor your positions from the comfort from your home or office.

In other words, the hard work is being done for you, and you just get to participate in the upside while keeping close tabs on the downside.

Regions with the biggest opportunity include onshore targets in Columbia, Africa, Poland, and Romania. Offshore targets in Israel also are garnering attention from the majors.

Small Cap Investor PRO lead research analyst Tyler Laundon and I just published a research report featuring two emerging market oil and gas exploration companies. Both are on the path to firming up their resource estimates, and have near term catalysts that should keep shares heading higher. The report is only for paying subscribers, so you'll want to sign up here.

Like all exploration efforts, you'll want to target companies with the highest chances of success, and get on board when momentum is building - not falling. So while I think there is huge opportunity in oil and gas exploration stocks, you need to keep your head on straight and make sure you've done your research.

If you do, I'm confident you'll have the opportunity to earn multiples on your initial investment over the next year. The world's thirst for oil and gas hasn't disappeared since the beginning of the recession, and I don't believe it ever will.

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

This article appears in: Investing , Stocks
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