Long-Term Commitment Required

 | Sep 16, 2013 | 5:00 PM EDT  | Comments
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Stock quotes in this article:

nbl

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eog

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apc

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xec

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pxd

My column from last Thursday spawned a ton of questions. The title that got people excited: The Best Opportunity I've Ever Seen? I explained how far-back-of-the-curve crude oil was the best risk/reward proposition I might have ever seen -- if I were starting a commodity hedge fund now (or any hedge fund), it was a trade I would devote much of my capital towards.

But it's true: You would need hedge fund capital to fully take advantage of this trade. The margin requirements are huge and it is a very long-term proposal. You would have to put aside this margin for a long time, although Treasuries and other fixed income assets can often be substituted as margin instruments.

Plus, as a good friend of mine, Michael Weiser, pointed out to me, the tax implications on long-term futures gains is still less advantaged than those in equities. He's right and he joins the chorus of the large majority of the mail and comments I got on this piece: Isn't there any way this idea can be replicated in an equity holding to achieve the same idea?

The answer in short is no. You're taking advantage of a mispricing of a financialized asset market and making it work in your favor over time. That kind of curve mispricing just doesn't occur in equities as it does in futures. However, the idea of mispriced (that is, logically underpriced) crude oil in the future does make some interesting stocks appear much more interesting -- if we're willing to make that long-term commitment.

What we're saying when we translate the crude curve to the exploration-and-production (E&P) companies is that much of the future production of liquids even two years into the future is being underrepresented in the stock price -- not as wildly under represented as it is in futures, but underappreciated nonetheless.

We are really giving another reason (and an excellent one) for circling back to the domestic E&P companies that are concentrated in crude and natural gas liquids (NGLs) in the shale plays and even in deep-water that have so far gone relatively unhyped.

I have spoken about this idea before, but the mispricing leads to even smaller-cap ideas than the relative behemoths I have hammered you with for the past several months: Noble Energy (NBL), EOG Resources (EOG), Anadarko (APC), Cimarex (XEC) and some others.

For this idea, with a very long-term horizon, I might even want to try some smaller-cap names that have far worse financials, but far better potential reserves, which could prove to be cash registers in December of 2014 or 2015.

There are a lot of names to look at and I hesitate to give too many, preferring you to do the homework on these. I suggest you concentrate in those undervalued plays in the Wolfcamp and Wattenberg areas. Perhaps there is still unflavored value to be found in the Eagle Ford area, but you'd have to really search.

I'm going to save my ideas or the next column, but I hope you will email me with some of your own. Send them to dan.dicker@thestreet.com. This this is a long-term idea, so we're not really in a rush. We just have to find a few of the best.

Spoiler alert: One of them is not Pioneer Natural Resources (PXD).

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