Yesterday I told you why I am interested in oil stocks. Now since the oil stocks have suffered a guillotine strike you could well expect a sand paper phase for at least some time to come. I am sure it would easily take more than a year for the sector to digest the shock henceforth frustrating investors who just bought the shares.
Get ready for miners to report appalling earnings and much lower asset values while some of them who have taken lots of debt will go bankrupt, I am sure most of them will be questioned for overstating reserves (yes it’s a usual phenomenon after a massacre).
Expect an insistent supply of bad news from the sector which is sure to sway investors with casualty stories all along. But when the massacre is over the stocks will finally rally, for now I would much rather focus on these five players who are innovative and already taken a beating on the markets.
Even though oil miners may not have been too concerned about innovative techniques during boom times, they are more likely to be responsive for cost cutting innovations now. As the US oil industry is starting to realize that beyond inexpensive hardware the subsequent opportunity lies in advances in automation, and clever control systems that require less workforce and henceforth less downtime.
Recon Technology, Ltd (RCON), my first pick for this write-up is a china based energy Services Company, it’s well positioned for outsized growth in this sector. While executives need to justify their exorbitant pays and profit linked bonuses the phase of cost cutting has already begun. Recon Technologies an innovative player shines in this realm, it has developed a patented fracking technique “Frac BHD” (it’s a multi-stage stimulation system) which cuts costs of extraction of shale oil through horizontal drilling, with variety of highly automated systems at improving production and distribution efficiency.
It’s a Chinese oil company listed on US stock exchange. The company has largely benefited from links with industry giants China National Petroleum Corporation and Sinopec; these follow firm 5-year plan commitments which enabled Recon to chase R&D efforts to make their own fracking system cheaper in the oil frontiers of Turkmenistan and Kazakhstan. Recon asserts Frac BHD makes best use of reservoir productivity while saving well completion time.
My next favorite is U.S. Silica (SLCA) I am sure unless you are a contrarian you won’t be interested, and yes I have nothing you haven’t heard of (SLCA) before. Newsletter vendors have been talking about the stock, for quite some time now I don’t have any big picture stuff to add about (SLCA) here, except I am bullish on the stock.
As expected the stock has produced excellent earnings result, it seems the stock is well insulated from the decline in oil prices, the most significant was the language used to define how the decline in oil prices will affect its business in the months to come. Earnings showed an extraordinary amount of growth in the long term I believe earnings will grow substantially since the recent decline in oil prices didn’t affect horizontal drillers until December. I assume Q4 would be another good quarter for (SLCA).
The reason I am bullish on U.S. Silica in the long term is its vast logistics network and the ability to increase train capabilities which puts it well ahead of smaller players. I cannot predict the timing of oil price normalization but owning the stock in anticipation… as expensive projects are shelved and the impending global demand grows is a blessing. I remain bullish on the fracking environment as 80% of the companies capacity is fully contracted until 2018.
My third favorite pick is Bankers Petroleum, BNKJF a pink sheet play, and a case of climbing revenues amidst the oil price massacre available at a 50% discount I presume. Bankers Petroleum produced oil cheap real cheap. It’s certainly in good shape than a lot of drillers, particularly shale drillers who count on oil being well up in the range of 60s or $70s to break even or make a profit.
A closer look at the financials looks rosy, earnings mostly climbing they aren’t likely to go out of business if oil falls to $30 a barrel at the same time it doesn’t mean they are going to thrive. Their margin at $50 oil is about $23 thanks to a hedging arrangement on the first 6,000 barrels daily this year. Yes they do have some production costs but their operating costs aren’t that high. When its current hedging arrangement runs off the margins would certainly be squeezed.
Will these favorites work out well with you? I am sure if oil goes back up a little… you will laugh your way to the bank.
If you have any of your own favorites do share them with us through the little comment box below I would love to hear from you.
Disclosure: I don’t have any positions in any stocks mentioned herein, and no plans to initiate any in the near future as well.