How to Trade in Oil and Gas Stocks – December 2011

Knowing how to trade in Oil and Gas stocks that have been getting hammered in the stock market in recent months is not easy… but there is some significant wealth (investment capital) to be created for the individual investor. With market leaders such as Suncor Energy getting to within 12% of its 2008 lows in August and September, and yet oil prices are not near those lows… you begin to wonder.  In addition, global inventories are at a 9 year low (despite the “recession)… so what can investors do during this volatility and times of uncertainty? It’s tricky… after all, the sector is down about 17% year to date. Here’s a few ideas for you to know how to trade in oil and gas stock wisely…

Trade Wisely…

The mantra here at Invest in the Markets has always been to preserve capital, minimize risk, and maximize returns. But whether or not oil and gas stock prices dip or rise, the principles don’t change. As a Weekend or Evening Investor, when I trade oil and gas stocks, I only buy the rise. When the prices dip… that’s not a time to buy; rather, wait until the stock begins to rise before buying… then keep a tight stop loss in place until you get some profits that you can rest on and recover your capital at worst. Remember, fundamentals have not changed… only fear levels, particularly in the oil and gas stock sector.

When buying any stock, revenues are essential… but when it comes to oil and gas stocks, buying companies that are in production versus exploration reduces your risk and still provides incredible opportunities for reward. So be cautious of the tendency to gamble on the future… instead, invest in what is already working. Buying stocks with production is similar to the principle of buying the rise.

Know the Oil and Gas Stock Intimately…

Gamblers take chances and speculate on outcomes… but wise investors run from speculation to the reality of the numbers. They build a relationship with their money… and who they allow their money to date. Only a careless guardian would let their money run out the door with someone / something they don’t know well. Even though companies like Connacher (CLL.TO) may have assets at $1.50 for example, their share price is closer to $0.50… a reflection on their high debt levels. Be cautious of companies with high debt… the more debt, the more the risk levels increase in such a stock. And listen to what the leadership says and don’t say. Companies like Banker’s Petroleum (BNK.TO) have consistently overestimated their earnings… and when you mislead the street, you get punished.

Here’s a list of some Oil and Gas stocks you may want to consider getting to know more intimately:

  • WFE.TO – Westfire Energy has tremendous potential.  Well costs are down to $1 Million… (at 85,000 barrels) it is costing them approximately $12 to find a barrel which means if Oil prices are around $90, they net $55… about a one to four return. Quite simply, this is an under-appreciated name.
  • ARN.V – Arcan Resources continue to produce well… and have significant cash supplies as they plan to ramp up production. This company is a prime take-out candidate now that they’ve repaired their balance sheet.
  • AAV.TO - Advantage Oil & Gas may be an Asian takeout target. Despite natural gas prices depreciated, this company has a 19 year preserve life… with great liquidity. If natural gas does go up, watch out! If it stays put, no worries because it’s not going anywhere.
  • LEG.TO – Legacy Oil & Gas is the best of proven production and continued exploration. Their Net Asset Value is at $8.00 which means investors pay very little for their upside (i.e. Alberta Bakken, Spearfish, Turner Valley). If these continue to produce positive results, there will be a huge increase ($3-4 per share). The CEO even has $23 Million of his own money invested… and as a proven value producer, this is encouraging. Watch for this to be a $15 stock.
  • FRC.TO – Canyon Services Group is a pure-play fracker. There is a very strong demand for all of their services even in these conditions.
  • PRY.TO – Pinecrest Energy is very economic. They have done very well drilling primary wells, but they are expanding their potential through water flooding. The risk/reward is appealing to investors who want proven results with potential expansion.

In my opinion, oil prices, and therefore oil stock prices, are unsustainably low as a rule. As we emerge from volatility into a more stable market environment, investors will see this area recover and perhaps even lead the way, producing double and in some cases triple digit returns.

Do you know how to trade in oil and gas stock? Well, you certainly know more now about how to trade in Oil and Gas stocks which may be one of the single most effective ways you can increase your wealth (investment capital) when world markets begin to stabilize.

6 Comments
  1. Great tips Doc! I learned something new today. ;) And Happy Thanksgiving.
    World of Finance recently posted..7 Credit Card MythsMy Profile

  2. Thanks for the tips. Hope your Thanksgiving was wonderful.
    Dr. Dean recently posted..Friday Follies: Cement Butt Edition!My Profile

    • Your welcome… Being Canadian, my Thanksgiving was several weeks ago, but thanks… I still enjoy the ripple effects of the Black Friday sales from down South :)

  3. Great tips! I recently started to become more interested in taking a hands on roll in my investment portfolio and these are some great tips!

    Also, i know what you mean by the late thanksgiving. I like the october edition of thanksgiving better.

    • Thanks. As you do, feel free to ask any questions you may have (privately or publicly). I’d love to see you be successful in your ventures of investing! Remember, preserve capital, minimize risk, maximize returns.

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