Peter Way on Forbes.com: Smart Money Sees Upside In Oil Stocks
by Peter Way, Oil & Gas Block Trader
The smart money is saying that there is money to be made in rebounding oil patch stocks, despite the plunging price of crude oil. People in the know in this business usually have good reasons for their actions. Right now, the block market-makers are placing pretty strong bets that oils are due for a rebound.
Markets have a number of essentials, but the prime requisites are traders, market-makers and communication. The communication capabilities today are so good that trader humor goes from market to market faster than the speed of sound. But that's not all that's traveling. Just as stock market-makers use hedging techniques to protect themselves, so do energy traders, at least most of them. Those that don't, like some in the news at present, often wish that they had.
Knowledgeable oil traders see a fairly quick recovery in crude prices after the end of this year, back up later in the year near their forecasts of as much as $95 per barrel on Aug. 7. Now, maybe their forecasts have high extremes of "only" $90. And crude is at $60?
What are the equally likely possibilities of low extremes? In nine contract expiration months of the next 13, the smart-money low forecasts are actually above the currently quoted settlement prices. If you were a well-informed oil trader, would you be selling or buying oil now in those contract months? What effect might that have on prices? We think that sets the stage for an optimistic outlook on oil patch stocks. And since the market always anticipates, if you want to make the most of the opportunity, you may have to act now, before the idea has a wide following.
That may mean some subsequent down days in price after your buys. How much pain might there be on the way to your gain? That's where the historical odds and payoff columns for each of the four oil-patch stock groups come in. You can use them to condition the appeal of stock candidates, depending on your willingness to confront the negative potentials the stock has presented in the past under similar forecast circumstances.
Take the major integrated oils as an example. You might be attracted to Devon Energy (NYSE:DVN) because of its involvement in the major strike with Chevron (NYSE:CVX) in the Gulf of Mexico, and encouraged by its block trader forecast of five times as much upside as downside. Its history following such forecasts is an average gain of +13.7%, but that has typically involved about one month out of the next three with prices 7.6% below today's. Some of those days might be down by as much as 9.7%.
If that is more angst than you want, maybe the third partner in that big find, Statoil (NYSE:STO) is a better choice. The block market-makers see only three times as much upside as downside, but they have had better results following that kind of forecast for this company.
Just by coincidence, the third party to the lucky Jack 2 strike, Chevron happens to be selling at a price that puts it at the most unattractive disadvantage of all the big oils to both its forecasts and its history. Perhaps by the time Jack 2 starts producing (in three-plus years) that will change, and opportunity will return to CVX. In the meantime, expect better returns from short-term investing than from long-term speculation.
Turning to the exploration and production stocks, market price drops have returned prospects for many of them back to the exceptionally attractive levels seen early in the year. Those with the best odds and payoff histories tend to be small-cap companies most likely to repeat in three months the double-digit gains foreseen now. Holly (NYSE:HOC), Berry Petroleum (NYSE: BRY), Toreador Resources (NASDAQ: TRGL), Swift Energy (NYSE: SFY), Southwestern Energy (NYSE: SWN), and Houston Exploration (NYSE: THX) are the standouts in this group, and they may be among the best bets in the oil patch.
The smart money is saying that there is money to be made in rebounding oil patch stocks, despite the plunging price of crude oil. People in the know in this business usually have good reasons for their actions. Right now, the block market-makers are placing pretty strong bets that oils are due for a rebound.
Markets have a number of essentials, but the prime requisites are traders, market-makers and communication. The communication capabilities today are so good that trader humor goes from market to market faster than the speed of sound. But that's not all that's traveling. Just as stock market-makers use hedging techniques to protect themselves, so do energy traders, at least most of them. Those that don't, like some in the news at present, often wish that they had.
Knowledgeable oil traders see a fairly quick recovery in crude prices after the end of this year, back up later in the year near their forecasts of as much as $95 per barrel on Aug. 7. Now, maybe their forecasts have high extremes of "only" $90. And crude is at $60?
What are the equally likely possibilities of low extremes? In nine contract expiration months of the next 13, the smart-money low forecasts are actually above the currently quoted settlement prices. If you were a well-informed oil trader, would you be selling or buying oil now in those contract months? What effect might that have on prices? We think that sets the stage for an optimistic outlook on oil patch stocks. And since the market always anticipates, if you want to make the most of the opportunity, you may have to act now, before the idea has a wide following.
That may mean some subsequent down days in price after your buys. How much pain might there be on the way to your gain? That's where the historical odds and payoff columns for each of the four oil-patch stock groups come in. You can use them to condition the appeal of stock candidates, depending on your willingness to confront the negative potentials the stock has presented in the past under similar forecast circumstances.
Take the major integrated oils as an example. You might be attracted to Devon Energy (NYSE:DVN) because of its involvement in the major strike with Chevron (NYSE:CVX) in the Gulf of Mexico, and encouraged by its block trader forecast of five times as much upside as downside. Its history following such forecasts is an average gain of +13.7%, but that has typically involved about one month out of the next three with prices 7.6% below today's. Some of those days might be down by as much as 9.7%.
If that is more angst than you want, maybe the third partner in that big find, Statoil (NYSE:STO) is a better choice. The block market-makers see only three times as much upside as downside, but they have had better results following that kind of forecast for this company.
Just by coincidence, the third party to the lucky Jack 2 strike, Chevron happens to be selling at a price that puts it at the most unattractive disadvantage of all the big oils to both its forecasts and its history. Perhaps by the time Jack 2 starts producing (in three-plus years) that will change, and opportunity will return to CVX. In the meantime, expect better returns from short-term investing than from long-term speculation.
Turning to the exploration and production stocks, market price drops have returned prospects for many of them back to the exceptionally attractive levels seen early in the year. Those with the best odds and payoff histories tend to be small-cap companies most likely to repeat in three months the double-digit gains foreseen now. Holly (NYSE:HOC), Berry Petroleum (NYSE: BRY), Toreador Resources (NASDAQ: TRGL), Swift Energy (NYSE: SFY), Southwestern Energy (NYSE: SWN), and Houston Exploration (NYSE: THX) are the standouts in this group, and they may be among the best bets in the oil patch.
posted by Spelunca at 8:55 PM
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