Saturday, April 4, 2015

Three more stocks to take advantage of inevitable rise in oil prices

I am adding the the following companies to both my speculative and investment portfolios as I believe that a bottom has been put in regarding oil prices. I do not think we go straight back to $100 a barrel but I see a gradual increase in prices as US production begins to roll over and relentless demand begins to reduce inventories.

On the investment side I am adding Bancolombia (CIB). Bancolombia is the largest bank in Colombia and is trading at five year lows. This is mostly due to lower oil prices and a rise of the US dollar versus the Colombia Peso. Oil accounts for 40% of Colombia's exports but only 8% of GDP. Even with the lower oil price the Colombian economy is forecasted to grow over 3% this year. As I expect oil prices to begin heading higher later this year we should see this headwind turn into a tailwind. The US dollar also looks like it may have found a intermediate term top as it now appears that the Fed may not be in as much of a hurry to raise interest rates as the market once thought. Regardless, the shares of Bancolombia are trading at a p/e of 12 and currently have a 3.4% dividend yield which the company has been increasing the dividend every year since 2001 including 2008/09 during the financial crisis. Colombia has adopted many free market reforms and should not be tarred with the same brush as some of its other South American brethren. On a three to five year time frame I believe an investment in Bancolombia will lead to market beating returns.

The next stock I am adding to the investment portfolio is TransAtlantic Petroleum (TAT). This is one I have a had a love hate relationship with going back four or five years. The company is run by its majority shareholder Malone Mitchell who founded Riata Energy which he later sold and which became Sandridge Energy. He then started TransAtlantic which has the majority of it assets in Turkey. However it never seemed he could get traction as the company built a drilling and service business and had distractions in Tunisia and Morocco. All of these distractions led to failed promises and loss of credibility with the markets. Fortunately the company kept doing seismic and drilling in Turkey and they are now seeing the fruition of their strategy as the company has now begun delivering on production and reserve growth promises. The drilling business was sold and the the other distractions were divested. The piece of news that has got me excited was the acquisition of three legacy oil fields in Albania. Many people do not realize that Albania has several billions of barrels of oil reserves. An example of what is possible in Albania is the Bankers Petroleum story. The company entered Albania in 2004 and had initial production of 400 bopd which has subsequently grown to 20,000 bopd in ten years. This was done by investing money and western recovery techniques to legacy fields that had last been worked on with Soviet era technology. If Mitchell can replicate or at least come close to Bankers success we will see a big upward revaluation in TransAtlantic's share price. The shares are currently undervalued just on the current assets. This has led the management to announce a share buyback as a way to pick up undervalued shares. As oil prices recover and if the management can keep its positive momentum going I expect a much higher share price.

My last pick is another company I have been following for years and is a pure speculation.  WesternZagros (WRZ.V) operates in Kurdistan and has a production sharing contract to exploit two concessions in southeastern Kurdistan. The company was a development company for many years but is now transitioning to a production company. The company began selling 5000 bopd into the local market on February 11, 2015. The management intends to increase this to 10,000 bopd later this year. WesternZagros only sees about 7% of the production from this after the split with its partner and the Kurdistan regional Authority. Nevertheless, these wells are very prolific and the company has contingent reserves over 1 billion barrels. The stock has been hammered on the lower oil price and the possibility of ISIS invading and taking over Kurdistan which would put WesternZagros out of business. I view this as a lower risk than most. I have been following the events in northern Iraq and the Kurds have been more than holding their own against ISIS after initially being put back on their heels. If interested you can follow the daily situation reports at the website of the Institute for the Study of War.  Over time I believe ISIS will be pushed back further from Kurdistan and the market will revalue WesternZagro's production upward as it deems it in a safe position.

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