Position Building in The Oil Patch

I’ve been having excellent conversations with subscribers about buying into the oil patch during the BP Gulf crisis. We’re seeing capital intensive companies with excellent growth prospects trading below book value. The scare that’s created it is the mystery surrounding the size of the liability such firms face.

What I think many are missing is that the mystery is what has created the cheap prices. It’s not like we were all watching companies priced for perfection on Monday, and suddenly discovered a potential multi-billion-dollar liability. No, the crisis and its political showboating with tough talk on the liability front has created talk of the worst-case scenario. Those of us who watched as these stocks were cut in half realize that the pricing happened before the news. If you run through future cash-flow projections, basic industry dynamics of supply and demand going forward, and realize that more of the supply is getting harder to harvest as demand goes steadily higher, the worst-case scenario appears to be priced in.

What I suggest doing to get around the queasiness all of us feel investing into such a maelstrom of awful news, is going about it gradually. Don’t put all your eggs in today. Put some of them in. Wait a day, or a week, or a month. Watch the valuations. Average into sizable positions over a period of time so that the market’s volatility works in your favor.

I can almost guarantee that the prices we’re seeing in some of the oil stocks will be looked back upon with envy in the future. This industry is here to stay, the deepwater portion of it is an increasingly important subsector, and some of the companies on the ultra-cheap are key players in that subsector.

Don’t let this pass you by.

Disclosure: No position in BP, but long others affected by the crisis.

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