Psychology has changed in oil stocks. Huge cash inflows are returning to the sector. And that means one very large group of oil stocks is poised to win significant gains.
It’s NOT the leaders—the very best companies. They didn’t dip as much in December-January, and they have already run. The Early Bird Caught Those Worms.
I didn’t sell my leaders (in fact I added a little bit but not enough) so I’m making good paper profits watching them go up. But if sentiment in this market is strong enough to allow the Tier 2 stocks to run….what to buy?
Let’s say WTI oil is going to $65—that’s $12/barrel or 25% from here. With most companies having a roughly $40 breakeven op cost, that’s a doubling of cash flows.
Does that mean stock prices double?
For the leaders who are already up 70-100% from their December or January lows, almost certainly not (but never say never).
Forget the fact that at US$65 WTI, very few US shale plays work at all for the juniors.
But in Canada it’s different—because of the Low Loonie. My guess is that US$65 WTI would only increase Canada’s dollar from 78 cents to 83-85 cents US.
A loonie worth 83 cents turns $65 oil into $78.31 oil up in Canada, and that price does work—and what I mean by that is that companies can grow production inside of cash flow (though a bit more slowly than they are used to).
Another positive factor for Canada—is condensate, or C5. The prolific Montney formation on the BC-Alberta border is very rich in condensate—a 50 API oil—which is used next door in the oilsands to dilute heavy oil for oilsands.
Condensate is now trading at 15% premium to Canadian light oil prices—a huge cash cow.
Even the leading natural gas stocks in Canada—almost all of them in the Montney—are trending up because their gas has A LOT of associated condensate.
Condensate is now $70/barrel in Canada (Edmonton light = US$49.66 x 1.23 CAD/US = 61.08 x 1.15 = $70.24). That produces great cash flow for these companies.
My list of the high-beta, Tier 2 companies that can really run if oil keeps moving gives investors a great opportunity to profit from oil in 2015—something nobody thought possible only one month ago.
The first wave of buying is over and the leaders have moved. The Next Wave will be focused here—find out these stories NOW. Click here.
PS—For free, I’ll add two other reports—The Top 3 Defensive Oil Stocks and The Three Junior Leaders—The Best Performers.