My Two Favorite Picks in the Speculative Oil and Gas Sector

Written by Mitchell Clark, Profit Confidential

Precious metals stocks have been slammed by the weakness in spot prices for gold and silver. The strongest sector for resource speculation remains oil. Oil prices are firmly holding above $100.00 a barrel; profitability among junior producers is solid.

In virtually all cases, resource stocks move with spot prices. Many junior oil stocks are trading right near their highs, but they aren’t accelerating with spot prices in consolidation around $105.00 a barrel for West Texas Intermediate (WTI) crude. But the numbers are still good, and it’s not just those companies with exposure to the Bakken oil region; many junior producers are posting solid production and financial growth, and should continue to be good investments.

One company doing well in Colorado is Synergy Resources Corporation (SYRG). This growing oil and gas producer has assets mostly in the Wattenberg Field in the Denver-Julesburg Basin, northeast Colorado.

Currently, the company is operating 218 wells and has ownership interests in 273 gross (219 net) wells. Synergy’s latest quarterly revenues grew 64% to $12.3 million. Average daily production increased to 2,256 barrels of oil equivalent (boe), a sequential increase of nine percent and comparable quarterly increase of 66%.

Being a junior producer, earnings were modest at $3.6 million, or $0.06 per diluted share, but this was a solid gain of 49% comparatively.

A Bakken producer that’s highly liquid on the stock market is Kodiak Oil & Gas Corp. (KOG). This growing company operates in the Williston Basin of North Dakota and Montana, as well as in the Green River Basin of Wyoming and Colorado. (See “How Rising Oil Prices Can Help Your Portfolio.”)

Kodiak’s second-quarter sales were $173.5 million, compared to $85.8 million in the second quarter of 2012. The company sold 2.1 million boe for a gain of 103%. Earnings were $44.3 million, or $0.17 per diluted share, compared to $93.1 million, or $0.35 per diluted share.

So there’s lots of growth in resources, but it’s mostly in oil and gas. The thing about junior resource investing is that it’s always high risk, and spot prices are equally-if not more-responsible for a growing company’s share price action. Even a company with a big discovery and lofty production forecast won’t do nearly as well if the spot prices are moving upward.

This is why growing companies like Kodiak and Synergy are currently experiencing a consolidation in their share prices. Spot prices are doing the same.

If I was to pick one speculative sector of the stock market that I felt had some of the most attractive prospects going into 2014, it would be the junior oil and gas companies. The price of oil is solidly holding at more than $100.00 a barrel and will advance on positive data on the U.S. and Chinese economies. And natural gas has nowhere else to go but up after its long price retrenchment (natural gas is a top buy low/sell high long-term trade).

As a speculator in junior oil and gas companies, valuation is an issue. Growth is growth, but not at any cost. The fundamental backdrop needed for this specific sector to keep on doing well is there. The marketplace is rewarding growing energy companies, and it’s through the drill bit.