Those interested in the oil business will know that smaller stocks in the sector have mostly been doing very well, even as the spot price of the commodity dropped below $100.00 a barrel.
The run-up has been pronounced in a number of companies, likely in anticipation of third-quarter earnings. Oil stocks advancing on declining spot prices is a very unusual development in the resource sector. But there is definitely an appetite out there among institutional investors for junior oil and natural gas producers.
One company we looked at previously is Kodiak Oil & Gas Corp. (KOG). This Bakken oil play reports tomorrow, and expectations are high.
Wall Street consensus is for Kodiak to generate sales growth of around 150% in its upcoming quarter. Earnings have the potential to double over the third quarter of 2012.
Company management recently announced its full-year 2013 average daily production will be approximately 30,000 barrels of oil equivalent per day (boepd). This compares to an average of 14,000 boepd in 2012. This year’s exit production rate is currently estimated at 42,000 boepd.
So, there’s definitely economic growth in the domestic oil and gas business due to new technology and the willingness of investors to finance junior companies.
Kodiak is trading right at its all-time record high after experiencing a meaningful consolidation throughout 2012 and the first half of this year. The stock is fully priced, which is no surprise. If oil prices were to reaccelerate, this position would be even higher.
Also reporting tomorrow is ConocoPhillips (COP), which is outperforming other big oil companies on the stock market.
ConocoPhillips spun off Phillips 66 (PSX) last year, which was a total gift to shareholders. Phillips 66 has basically doubled since listing (including dividends), and still offers a current yield of 2.5%.
Getting back to smaller producers; if a company like Kodiak delivers with its numbers, there’s no reason at all why the position won’t keep ticking higher.
The selection of high-growth junior producers isn’t that large and one could certainly trade off the momentum.
Triangle Petroleum Corporation (TPLM) is another Bakken play we considered not too long ago. (See “Why the Street Is So Bullish on This Junior Oil Producer.”) This junior producer illustrates the volatility that can be experienced in the operations of a junior oil and gas business. The company has found its stride, and the stock has been soaring.
In terms of portfolio management, I think it’s a worthy risk to have a couple of junior resource picks, perhaps with one in domestic oil and gas and the other in gold/silver.
The wind has been taken out of precious metals stocks due to lower spot prices, but there are some quality junior companies out there with growing production and solid balance sheets.
All resource investing is speculative and mostly for risk-capital investors. Blue chip gold companies like Barrick Gold Corporation (ABX) and Newmont Mining Corporation (NEM) have been hammered by weaker spot prices and higher costs. Everything comes down to the spot price in precious metals investing.
But junior oil and gas stocks are a bright spot, even with prices in consolidation. Expectations certainly are high, but so is the production growth.