Hot penny stocks in the oil patch

Let’s start out with a poem, sort of.

“If you sold in May, you did OK. If you bought in June, it might have been too soon. But if you hold in July, you might ask yourself why?”

The lyrical words are those of an insider in Alberta’s oil patch known only to his readers as Wildcat Willie. He offers his inside observations regularly in Investor's Digest of Canada.

And he says it’s time to speculate.

“Buy and Hold isn’t going to cut it in this market,” he proclaims.“Governments around the world, and especially ours, are printing enough Monopoly money to nationalize Boardwalk and Park Place.”

So why shouldn’t investors scoop up a healthy slice of all the money that’s going around?

Willie takes us into speculative territory with two penny stocks and another stock that is already making up ground fast.

Speculation no bad thing

Speculation “isn’t a bad thing; it’s the main reason you’re reading this column,” Willie reminds his readers. But it calls for a change in tactics.

“And the first tactic in an unfair fight is to cover your backside,” he explains. “It’s no time to be taking a kick in the balance sheet.”

Look for companies with high capital efficiency, he advises. This is always measured by reserve growth.

“He who finds the most new barrels at the lowest cost in evitablywins the race.” And we’re off to the races with a little stock that canwhip the big guys.

Completely under the radar

Action Energy Inc. (TSX/V-AEC) “stacks up against companies 10 times its size, a fact that has gone completely under the radar of the market,” says Willie.

It has a nice balance of oil and natural gas, which “can smooth out the commodity roller coaster. Especially when oil prices are holding above$60 a barrel and natural gas is headed for no-man’s land.”

Cash flow is an issue, and it make take one or two financings to get the good stuff out of the ground, our insider admits. The first thousand barrels a day are always the hardest, he sighs, but Action could easily double output with a reserve life of over 22 years.

Even at its low price (around $0.21), the stock is trading at an enormous discount to its Net Asset Value (NAV). “Which means this thing should be worth more than a buck and change even by today’s modest standards,” says Willie.

The company could improve its cost management some, but economies of scale are always a struggle with small firms.

And the share price should follow production higher, as long as the company can keep the lights on with a bulked-up capital program.

“But take heart, it’s a lot easier to hit doubles and triples — and even home runs — as a penny stock.”

This is still a growth story, Willie asserts. “Action won’t be this cheap for long, assuming it isn’t taken over first. Even then,it’s a good outcome.”

Galloping ahead

Here’s a horse of a slightly different colour. Its shares are already galloping ahead. “Everybody loves a winner, and playing the ponies is no exception,” says Willie.

Painted Pony Petroleum Ltd. (TSX/V-PPY.A) was one of the top performers among microcap stocks in the first quarter of the year.

“Through May it had kicked back almost 200 per cent to all the lucky longs that jumped in the saddle around Christmas time last year.”

There are a lot of hopes riding on this one, Willie tells us,since it’s trading at a small premium to its net worth. It’s more established than Action, turning out 1,500 barrels a day. Like Action,it is nicely split between oil and gas.

Before the markets crashed, the stock rode as high as seven dollars. It plunged to near penny stock status before making the turn. As Willie wrote, it stood at $2.60. Since then, it has already shot up to $3.91.

You’d better be ready

“In times like these there’s always room to take a calculated risk,” Willie says as he introduces this third choice.

What could be more risky these days than natural gas? “There is no place to go but up,” our insider states flatly.

Twoco Petroleums (TSX/V-TWO) is all gas. It may take a while for the natural gas market to sort itself out, Willie concedes.

“But when it does, watch out. Things can change fast and you’d better be ready.”

In this field, it is absolutely essential to be a low cost operator, and Twoco fits the bill at $6 and change per barrel of oil equivalent. Even at today’s distressed prices, gas is worth $20 to $30a barrel, so that’s probably good enough to keep Twoco humming along until the market turns upward.

“And it will,” Willie assures his readers in Investor's Digest of Canada. Twoco, which is trading at $0.84 today, will be in the right place to capitalize on it. “Just be there when it does.”

If you’re looking for excitement, you’ve come to the right place.