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Dividend King
Dividend King
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5 Oil & Gas Plays for Aggressive Investors

February 22, 2012 | About:

Oil and gas companies should be a part of any well-diversified portfolio. There are many companies to choose from and they cover a wide range of risks. The companies also cover a broad spread of stock types, from low-risk income stocks to higher-risk growth stocks. In this article, I examine five speculative growth oil and gas stocks that could present potential opportunities for aggressive investors.

GMX Resources (GMXR): GMX Resources has fallen dramatically over the past year from the $6 to $7 per share range down into the no-man's land of less than $5 per share and has most recently bounced a bit off $1 per share. The company's PEG ratio is as cheap as the stock itself at -0.80 with a five-year earnings growth forecast of 10%. These types of stocks can be deceiving in that they look cheap but can lose their value very quickly on a percentage basis. For instance, if you bought (100 shares) at $6 for $600 the value of your stock would be only $100 now.

They can gain in value just as dramatically — but it is rare. This is why institutional investors are generally prohibited from investing in stocks below $5 per share. That being said, this is one of the highest-risk types of stocks you will come across and totally speculative in nature. It should be positioned as such in your portfolio. In my opinion, the company seems to be chasing profits and is suffering from a classic case of short-sightedness. Instead of diversifying its operations among commodities, the company is now shifting 100% of its drilling activities to oil and away from natural gas.

Kodiak Oil (KOG): Kodiak Oil hit its 52-week low of $3.59 per share in October 2011 and has since risen over 150% to the $10 per share level. This may be one of those rare events where a stock breaks out of the no-man's land to form an upward trend. None the less, the stock represents the next level up in risk as the advance may have been just the result of a short squeeze without any fundamental catalyst. The company's closest competitor Cabot Oil & Gas (COG) has a PEG ratio of 1.86 and five-year earnings growth forecast of 32.5%. Another competitor, Marathon Oil (MRO), has a PEG ratio of 2.47 and five-year earnings growth forecast of 3.5%.

Kodiak Oil has been coming up short in terms of its forecasts and the stock is moderately priced in terms of these forecasts — with a PEG ratio of 2.30 and five-year earnings growth forecast of 20%. Though shares of Kodiak are cheaper than the two competitors mentioned above, I believe the company has more potential for growth, because of its ability to expand and adapt to new market conditions rapidly. The stock is still very speculative in nature and should be positioned as such in your portfolio.

Royale Energy (ROYL): Royale Energy hit its 52-week low of $1.73 per share in October 2011 and has since risen to the $5 watermark where it has been treading water since December. In the trailing 12 months Royale Energy's gross margins have been coming in at 63.74%. These margins are much higher than its nearest competitor Abraxas Petroleum Corporation (AXAS)'s with gross margins over the past 12 months of 57.72%, which says a lot about management's ability to control costs especially in light of the company's recent acquisitions in Alaska.

Out of 178 tracts of land being bid upon, Royale Energy won 60 tracts acquiring over 100,400 acres of property. There were 12 other companies bidding on the leases. Royale Energy is based in San Diego, Calif., where it was incorporated in 1986. The company produces and sells oil and natural gas in the U.S. In addition to these operations the company engages in the drilling of exploratory and development wells and the sale of working interests in wells to be drilled. The company also acquires oil and gas lease interests and proved reserves. In spite of the effective management of the company I still think it is speculative due to the price level of the stock and should be positioned in your portfolio in this regard.

ATP Oil & Gas Corporation (ATPG): ATP Oil & Gas Corporation has fallen from $21.41 per share down to the $5 watermark where it has hovered since mid-November 2011. In the past 12 months ATP Oil & Gas Corporation's gross margins have been coming in at 77.76%. These margins are much higher than its nearest competitor ENI (E)'s with gross margins over the past twelve months of 28.40% and Newfield Exploration Company (NFX) with gross margins of 69.16%. This says a lot about the management's ability to control costs and the stock price decline is most likely due to overzealous short sellers playing follow the leader. Short-sellers, due to lack of any real intelligence, usually play this game. Then they panic en mass when the stock rises and drive the stock even higher when they bail out — hencethe term short squeeze. The shorts haven't gotten around to pulling the plug yet. Although the price of the stock does represent an added risk and should be considered speculative, the upside potential offsets this risk to an extent.

Samson Oil & Gas Limited (SSN): Samson Oil & Gas Limited has never really been above the $5 per share watermark and without a miracle of a catalyst there is no reason it ever should. In my opinion, you could call this stock highly speculative but I don't see any reason one would want to buy it at all. The company does however have an impressive trailing 12-month gross margin of 47.78%. This is quite high compared to its closest competitor ENI's with gross margins of 28.4% and Black Hills Corporation (BKH)'s with gross margins of 27.06%.

The company also has several projects in process but has never gotten the attention of investors. Samson Oil & Gas Limited was established in 1980 and is based in Perth, Australia, and other than its operations in that country it also holds interests in projects located in the U.S. The company is involved in the exploration for and production of oil and natural gas. Samson Oil & Gas Limited has interests in Lea County, New Mexico; Williston Basin, North Dakota; Brazoria County, Texas; Goshen County, Wyoming and Roosevelt County, Montana. The stock is speculative in nature and should be positioned as such in your portfolio.

About the author:

Dividend King
I am primarily an investor interested in creating passive income streams through dividends. I focus on finding and analyzing dividend paying stocks, MLPs and REITs that are a good fit for income investors.

I practice Judaism and my faith is very important to me. I visit family in Israel once a year, but I am educated and work in the United States where I hold an MBA and a bachelor’s in English. I am a patient man, enjoy wine but am not a connoisseur, and I listen more than I speak.

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