How Rising Oil Prices Can Help Your Portfolio

There are a lot of reasons why the spot price of oil is back over $100.00 a barrel, and the fact that it is up there is very good for oil stocks.

The price of natural gas continues to be subdued, but that doesn’t mean that oil and gas companies that are growing production are not able to do well on the stock market.

Resource equity investing always has the added risk of the value of the underlying commodity, but the Bakken oil boom, itself a counterplay on oil prices, is creating a number of winners.

We looked at Kodiak Oil & Gas Corp. (KOG) before. This is one of the many highly liquid oil stocks that have become a big favorite of institutional investors.

Kodiak has oil and natural gas reserves concentrated in the Williston Basin of North Dakota and Montana and the Green River Basin of Wyoming and Colorado.

Kodiak’s first quarter (ended March 31, 2013) saw oil and gas sales of $165.1 million. That compared to $79.9 million in the comparable quarter in 2012 and $130.8 million in the fourth quarter of 2012, representing increases of 107% and 26%, respectively.

The company sold 1.95 million barrels of oil equivalent (MMBOE) in the first quarter of 2013 for a gain of 103% comparatively, of which 94% was crude oil.

Earnings came in at $19.4 million, or $0.07 per diluted share, compared to $1.7 million, or $0.01 per diluted share, for the same period in 2012.

There are plenty of oil stocks in the equity universe that have done well and should continue to do so. But even the top growth stories generally don’t see their share prices appreciate unless either oil or natural gas prices are soaring.

That’s why there’s a great deal of growth when it comes to speculating in oil stocks and resource stocks in general. You always have to keep in mind that the underlying commodity rules.

The other indicator to watch out for when it comes to speculating in oil stocks comes from the fact that these companies always require new capital in order to grow. That means that if their share prices are stronger, it’s increasingly likely that they will issue new shares and/or debt to the marketplace. Shareholder dilution is a fact of life with oil stocks, especially smaller production companies.

In more aggressive equity portfolios, there certainly is a role for one or two junior oil stocks. Resource investing requires a solid package—qualified management, good backing from Wall Street and strong institutional interest, great properties, and the prospect for meaningful production growth over a number of years. (See “What’s Signaling the End of the Current Recovery?”)

But it is worthwhile to keep this thought in the back of your mind: no matter what the growth story or the prospects for the future, resource stock investing is a high-risk endeavor.

For serious speculators in oil stocks, it is useful to deal with investment banks that specialize in raising capital for this sector.

Everyone knows where the oil and gas is. The rest is just a game of who can raise the money to go get it profitably.