One benefit of writing on Real Money is the readers who have become friends over the years. I have a crew of regular readers who have become good friends and we talk via email and chat often.
One such reader is David in California, who is a fellow Orioles fan and value aficionado. He is one of the smartest people I know and is a source of fantastic ideas. I have stolen column ideas from him frequently.
He suggested we look at the beaten-and-battered oil stocks that have fallen sharply over the last year. That could form a Lazarus portfolio of extreme longshots that could go to zero if we have sustained low oil prices. But they could also shoot up by tenfold, or more, if we see a price recovery in the next few years.
I do not suggest doing this with a significant percentage of your portfolio, but a small percentage devoted to this type of aggressive longshot speculation could pay off big if the oil bulls like T. Boone Pickens are correct.
Note also the comments from European oil CEOs and an Organization of Petroleum Exporting Countries official. They suggest that we could see an oil spike of epic proportions in a few years if too much capacity is taken off line because of the current low prices. A 2% allocation to this bet could add several points to your overall return. If it doesn't work, you a lose a small percentage spread over several years.
When I go to the racetrack, I look for certain characteristics in longshot horses that have proven to work well in the past. I am going to apply the same logic to super longshot oil bets. I want see a significant level of insider ownership in my battered- oil picks. I want the folks running the company to have the same risks and rewards as I do. If it works I want to sip champagne with them as we count our cash, and I want them to feel my pain if we lose our bet.
I picked eight stocks that have tumbled significantly and now trade in the single digits for our Energy Lazarus Portfolio. My first stock is going to be one I bought in December. Gran Tierra Energy (GTE) is a Canadian company that has oil and gas properties in Colombia, Peru, and Brazil. They are debt free so they have a decent chance of surviving until energy markets recover. Insiders have 5%.
Parker Drilling Company (PKD) provides contract drilling and drilling-related services and rental tools around the world. The stock is down 60% in the past year and insiders are feeling some pain as they own 5% of the company. In November and December, the CEO and two directors were buying more of the stock.
Key Energy Services (KEG) operates as an onshore rig-based well servicing contractor in the United States and internationally. They have huge exposure to fracking and shale fields and that production is likely to be among the first to shut down. Insiders own 5% of the shares and have seen their holdings decline by more than 75% in the past year.
Rex Energy Corporation (REXX) also has massive shale exposure as their operations are primarily in the Marcellus Shale, Utica Shale, and Burkett Shale drilling and exploration activities in the Appalachian Basin.
They also have developmental drilling and enhanced recovery operations in the Illinois basin. The stock has fallen by more than 70%. Insiders own 16% of the company so they have a vested interest in surviving until they can thrive again.
Comstock Resources (CRK) has its operations centered around eastern Texas, northern Louisiana and southern Texas. They have been aggressive about positioning for survival by cutting capital expenditures, eliminating the dividend and raising $700 million in a secured bond offering. Insiders own 7% of the company and several were adding to their stake in late 2014.
Goodrich Petroleum (GDP) is yet another shale oil company with operations in T located in southwest Mississippi and southeast Louisiana, south Texas, northwest Louisiana and east Texas. The stock has been crushed by 80% and insiders own17% right now.
Swift Energy (SFY) has been my biggest mistake in years as the stock fell by 70% in the past year. I did not take my loss and still hold the stock. If we get an oil price improvement I could recover most, if not all of my gain. Swift has operations in Eagle Ford trend of south Texas, as well as the onshore and inland waters of Louisiana. Insiders could see their 5% stake improve significantly if oil prices improve over the next couple of years.
Dawson Geophysical (DWSN) is an interesting selection for our Lazarus portfolio. Insiders own 28% and the balance sheet actually earns a z-score of over 3, indicating little risk of near-term financial risk.
Dawson provides onshore seismic data acquisition and processing services in the United States and Canada. Business is going to be terrible until exploration activity increases, but this company looks as if it has the strength to survive until we see a recovery. Insiders hope so as the 75% decline in the stock in the past year has trimmed their net worth substantially.
I like this idea and I believe odds are better than they appear at the moment that several of these stocks pay off big in the years ahead.
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