Beat Big Oil with These 4 Independents

09/01/2011 11:30 am EST


Peter Way

Founder and CIO, Peter Way Associates

Oil and natural gas prices have been very volatile in recent weeks, but these wildcatters have big prospects of their own...and are always under the ’threat’ of acquisition, writes Peter Way of Block Traders’ Oil and Gold Monitor.

The past few weeks’ decline in oil from just under $100 has taken the settlement curve dropping towards the $80-a-barrel mark. But it retains a strong contango back up to the $90 area, a gain of +9% in a little more than a year.

Hedgers are, in all but the nearest months, persisting in their expectations of a return to prices around the $100 level well before that, with a willingness to protect against rises as high as $130 month after month.

That combination foretells a strong and recovering market, despite all the financial media’s fearmongering that a double-dip recession will produce poor demand and weak prices. That’s not what knowledgeable market participants are saying by their very substantial actions.

The situation provides some buying opportunities in energy stocks. As usual, the big integrated oils are priced up for their defensive market behavior in tough times.

That group can keep nearly $1 trillion of investment from suffering any serious lasting damage in a market panic. But it takes very adroit timing skills there to engineer stock returns that are competitive with many others from the oil patch.

Independent exploration and production (E&P) companies’ stocks react to near-term crude oil stories, and periodically are priced against outlooks that provide good price gain opportunities.

But ultimately their resource discoveries ensure the acquisition attentions of the big integrated companies. Improved recovery technology for natural-gas deposits—often a byproduct of oil drilling—is enhancing their appeal.

  • EV Energy Partners LP (EVEP) retains strong upside, with a sell target +15% higher. That’s a bit above its average profit experience, but well below extreme gains it has experienced. Its past-year consistent growth earned a risk-reward ranking better than 97% of our overall population.
  • Noble Affiliates (NBL) has a long history of success following forecasts like the present with small drawdowns (-6% or -7%) present an average of only one day a week. Its well-behaved risk-balanced results score better than 92% of our entire population of stocks.
  • Berry Petroleum (BRY) carries a current forecast with an upside sell target of +22%, an objective between its average gain performance of +20% and its typical maximum of +41%. Avoiding drawdowns in better than three-quarters of the next three months’ days, BRY has been a reliable performer.
  • Concho Resources (CXO) is another strong recovery candidate. Its upside +18% sell target is within reasonable reach. Past experience has gains during 76% of the 3 months following similar forecasts. In the past year or so it has contributed gains at a 56% annual rate on 23 buy recommendations.

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