How to Research an Oil Stock

In one of the most satisfying series of articles I've penned for the Fool, I recently stepped through the process that I personally employ when investigating an unfamiliar stock for the very first time. Sure, it happened to be an oil and gas producer, but I think any reader interested in sleuthing a stock, whether it's a value name like Lowe's (NYSE: LOW  ) or a hot new IPO like A123 Systems (Nasdaq: AONE  ) , should find the articles of interest. In case you missed it, here's a breakdown of the series.

In Part 1, we met Gulfport Energy (Nasdaq: GPOR  ) , a small-cap exploration and production (E&P) company. Straight off the bat, we eyeballed the company's share structure and capitalization. You wouldn't assemble a fantasy baseball team without studying players' stats, right? So it goes with stock picking. This quick review highlighted a debt load that required immediate attention, and a reading of the most recent SEC filings revealed a somewhat strained liquidity situation. We concluded that, like ATP Oil & Gas (Nasdaq: ATPG  ) and Hercules Offshore (Nasdaq: HERO  ) last week, Gulfport will likely issue stock to pay down debt.

In Part 2, we sized up the players involved, from the board and management to key shareholders. This pointed us to a tangled web of relationships centered on Wexford Capital, which is also involved with Bronco Drilling (Nasdaq: BRNC  ) and the recently restructured Energy Partners Ltd, where a former Gulfport CEO now runs the show. Gulfport's proxy made for interesting reading, with all sorts of related party transactions detailed.

From there we proceeded to Part 3 and Part 4, in which we assessed Gulfport's production and reserves. Some unfavorable findings here nearly led me to throw in the towel, but a few Fools urged me to continue. I'm glad they did, because that gave us a chance to cover another rather distinct aspect of the business -- Gulfport's stake in the Canadian oil sands. You can read all about that in Part 5.

We concluded with a preliminary valuation in Part 6, primarily using market transaction multiples to value each piece of the corporate pie. This approach increases our reliance on prevailing sentiment, but avoids forecasting folly. I won't spoil the ending, but I should mention that if we were correct in Part 1 to assume that a share dilution is coming, my estimate of Gulfport's per-share value would currently be too high.

So newbies, are you still feeling in the dark when it comes to oil and gas investing? Or, for those more advanced investors, do you think I flubbed something in my analysis, or overlooked an important topic? Let's talk it out in the comments section below. And if you have questions about where I dug up any of the information cited throughout the series, or have other oil and gas companies you would like to see covered, let me know! 

Lowe's is an Inside Value recommendation. For more stocks offering a margin of safety, give the service a spin, free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (21)

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  • Report this Comment On September 28, 2009, at 1:24 PM, XMFSmashy wrote:

    mysticstocks,

    Thanks for reading. I'm afraid that one's too tiny for me to weigh in on.

    TS

  • Report this Comment On September 28, 2009, at 4:19 PM, Knotes wrote:

    You wrote, "if we were correct in Part 1 to assume that a share dilution is coming, my estimate of Gulfport's per-share value would currently be too high"

    Maybe you can help me with this. I never understood why issuing stock (dilution) is always assumed to have a negative effect on shareholder value. I understand that each share is less valuable because it represents a smaller percentage of the firm. On the other hand, isn't each share more valuable if they are able to reduce debt and interest expense? To me, it seems like it should be a wash if you assume mgmt. allocates the proceeds wisely and I'm not sure what I'm missing.

    Thanks,

    -Dan

  • Report this Comment On September 28, 2009, at 9:08 PM, KingLeonidas wrote:

    Schwab has HERO as an "A" rated stock......The Fool recently touted HERO to my knowledge but now all of the sudden has a negative opinion?

    I believe HERO closed at $5.02 today and $5.00 on Friday of last week.......it will be interesting to see who is more right about HERO in the short and long term.....Schwab or the Fool?..........

  • Report this Comment On September 30, 2009, at 10:23 PM, XMFSmashy wrote:

    Dan (DWMar),

    You note that share dilution "seems like it should be a wash if you assume mgmt. allocates the proceeds wisely." That's giving management teams that have run into debt problems a lot of credit, is it not? Companies like Noble Energy and Apache were run conservatively prior to the crash and didn't have to scramble to repair their balance sheets. Those are the companies I trust to allocate the proceeds of equity offerings wisely.

    Toby

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