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The European debt crisis may have sent many investors to the sidelines. But the world’s biggest (and richest) oil companies aren’t among them. Instead, they’re using the fear, uncertainty and bargain valuations to their advantage, and are going on a shopping spree.
No, I don’t mean they’re buying Christmas gifts early. They’re shopping for small oil exploration and development companies that most investors have never heard of before.
And if you know what companies are likely to be on their list, you have a great chance to double your money in a matter of months.
Proof: my boss Ian Wyatt and subscribers to his $100k Portfolio newsletter nearly doubled their investment when the Norwegian firm Statoil (NYSE: STO) offered to buy Brigham Exploration (NYSE: BEXP) for $4.4 billion. That was a 20% premium over the previous day’s share price.
Another oil company in his Top Stock Insights newsletter portfolio, Complete Production Services (NYSE: CPX) rose by 29% in one day after mid-size oil company Superior Energy Services (NYSE: SPN) made a similar buyout offer.
Both of these deals were announced a couple weeks ago, and created big profits for shareholders. Fortunately, some of Ian’s subscribers were among those to profit.
These types of big gains are common when larger oil companies buy out junior oil exploration and emerging production companies. And the reason these larger oil companies buy smaller exploration and development companies is simple: it’s the single fastest and easiest way to increase big oil’s reserves.
You won’t ever see shares of a large oil company double overnight – but it’s certainly possible with these little guys.
So if you’re interested in making big gains in the oil sector, you need a list of small exploration companies that sell at a fantastic discount to their oil reserves.
Now… that’s obviously easier said than done. But there is a way.
The first clue to figuring out which companies may be takeover targets lies in the value of the potential takeover target’s reserves.
So why would mid-sized oil companies like Statoil and Superior Energy Services pay such a healthy premium in order to acquire junior oil companies?
Well, the first reason is to expedite the takeover. A generous takeover bid is more likely to be accepted by the majority shareholders. And paying a healthy premium above the recent share price may also dissuade other oil companies to offer competing buyout offers.
But the real reason is because these big oil companies have crunched all the data and they’ve come to the conclusion that they can still swing a significant profit even if they have to pay a premium for shares of the best small oil companies that have great prospects.
This is especially true right now, after many small companies have seen their share prices decline dramatically on global growth concerns. As a result, many small oil exploration and production stocks offer very compelling values. For investors who can look beyond the news headlines of today, there are great junior oil companies that are very attractive.
Otherwise, big oil wouldn’t make the deal.
The secret lies in the fact that big oil usually knows more about the oil production potential of these companies than the market does.
That’s because most investors follow the estimates and guidelines of the Canadian Securities Administrators (CSA). Now, I’m sure the CSA is filled with smart folks, but not many of them are oil experts. Their rules and regulations are designed to create huge safety buffers and they basically make it impossible for oil companies to overstate reserves in their official numbers.
If you’re savvy about the oil business though, you can figure out that CSA margin of safety for each company.
Sometimes it’s tiny. If a company is already in production, there’s really not much of a difference between real reserves and estimated reserves.
But if a company isn’t yet in production, or if they only have a small amount of production, then it’s likely that there’s a significant buffer.
For companies traded on U.S. exchanges, you’ll be able to find these reserve amounts in their SEC filings.
For example, according to official SEC filings tiny oil development company Oilsands Quest (AMEX: BQI) has ZERO proved reserves.
To the average investor, that means no income, no growth and no reliability as a long-term holding. Based on the official filings, the company looks like a dud.
But if you dig a little deeper and understand BQI’s geology and can understand the likelihood that some of the company’s 466 drilled wells will produce oil – then you can confidently buy this stock, even at a premium.
I’m not saying BQI is the next takeover target – it’s just one example. There are many others out there, and at least one more in Ian’s $100K Portfolio.
One thing is for certain – big oil isn’t done shopping.
Good investing,
Kevin McElroy
Editor, Resource Prospector
Richmond, Vermont