Oil Stock Investing: US Onshore Oil Companies Can Boost Your Portfolio…

| September 22, 2011 | 0 Comments

I’ve been talking about the benefits of investing in the onshore US shale oil and gas industry for a while now.  In fact, I think buying stocks in this burgeoning industry is one of the best ways to grow your portfolio in coming years.

In a minute, I’ll share two ingredients essential to picking winners in this industry.

But first, let’s recap a few benefits of the US onshore oil and gas industry…

First of all, it’s an industry that creates jobs right here in the good ole’ USA.  Take North Dakota for example- according to the Bureau of Labor Statistics (BLS), the state has as unemployment rate of 3.3%… the lowest in the country.

The plethora of jobs in the area is due to the shale drilling boom in the Williston Basin… also known as the Bakken shale.

The industry also provides much needed energy to the US…

According to the Energy Information Administration (EIA), US oil production is growing for the first time since the early 1980s.

As you can see, annual US crude production has risen over the last two years (red circle).  That sudden rise breaks the long-term downtrend in production we’ve seen over the past 25 years.

Any rise in US oil production will help diminish the need for expensive overseas oil… and that’s a very good thing.  And it’s all due to the resurgence of the US onshore oil industry.

But for investors, the most exciting thing about this industry is the potential returns…

The profit potential in small-and mid-cap US onshore oil explorers is enormous.  Just take a look at the gains in Brigham Exploration (BEXP) and Northern Oil and Gas (NOG) over the past two years.  You’ll see exactly what I’m talking about.

There’s one simple reason for this exceptional performance…

These companies are providing a product that’s essential to the US economy… oil.  And with world energy demand constantly on the rise, it’s highly unlikely oil prices will fall and remain low for a sustained period.

So as long as companies control costs, they’re highly likely to start pulling in hefty profits for themselves… and investors.  If you hitch your wagon to the right up-and-coming small-cap US oil producer, you have the potential to pull in fantastic returns.

So what should you look for in a US onshore oil company?

When it comes down to finding the best small-cap oil and gas stocks, I believe in keeping it simple.  In fact, there are two primary things I look for in potential investments in this industry.

First of all, I want to see a company with an accelerating production rate.  If production is growing and management foresees it growing into the future, it’s a clear sign of high revenue growth potential.

Next, I look for companies with a big percentage of oil in their proved reserve base.  In other words, you want to see more oil than natural gas.

Why?

It’s simple.  Oil has the highest profit margins in today’s challenging market environment.  Companies make more money bringing oil to the surface than they do with natural gas.

I like to see companies with at least 75% oil in their reserve base…

So if you come across a small cap oil producer with accelerating production and a high percentage of oil in their reserves, keep a close eye on it.

I’ve used this strategy to pick promising US onshore oil companies in our Energy Investor service.  Before the recent market downturn, we had several of these plays posting gains of 83%, 32%, and 25%.

But the best part is, these quickly growing companies are on the cusp of heading much higher.

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Category: Commodities

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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