Posted on Wed, 10 December 2014 13:16 | 0

As oil prices continue to drop and the Saudis predict stabilization only at around $60 per barrel, the savvy investor will find a multitude of opportunities to get in on the American oil boom this Christmas for cheapand junior companies with conventional assets are poised to raise a lot of attention.

Brent and WTI crude hit a new five-year low on the back of already falling prices, and as prices continue on their downward spiral, competition in the industry is tightening. But its not just about oversupplyundervaluation is playing a major role in market dynamics, and this is where investors will find new windows of opportunity.

While consumers appreciate these falling prices, for producers it can translate into a drop in earnings. Even the supermajors such as Royal Dutch Shell (LSE: RDSA, RDSB) and BP, are taking hits, and shareholders may be concerned that they will have to cut dividends. ConocoPhillips (NYSE: COP) has announced it will cut its 2015 capital budget by 20%.

While some investors are hastily dumping shares, others are prudently snapping up bargain-price investments not seen in years. Cheap shares are coming out of the woodwork and bold investors could scoop up shares at cut-rate prices, banking on future stabilization.

Industry analysts agree: oil prices are not expected to significantly rebound in 2015, but the oil slump cant last forever. The bottom line is that the current market undervalues oil, and therefore, North American oil and gas production is still a safe, long-term bet.

Compounding problems for producers is the fact that the price of drilling has increased over the past few years. This is exacerbated by companies who focus on hydraulic fracking and horizontal drilling in key shale plays, where costs are higher still, coming in at $40 to $75 more per barrel than conventional drilling and extraction methods.

Despite low oil prices, analysts conservative price outlook, and increased drilling costs, there are still some very promising opportunities for oil and gas investors that could help insulate investors from falling prices, particularly for long-term investors who are willing to stick it out over the long haul.

According to Ibbotson Associates. small-cap stocks generally outperform large caps over the long haul, and periods of sustained underperformance, which clearly took place throughout 2014, have historically created an environment for a sizeable spike in small-cap stocks with strong management teams.

Small-cap E&P Continental Resources Inc. (NYSE: CLR), for instance, has demonstrated a forward-thinking attitude attractive to investors. It positioned itself years ago at the forefront of the market when it became among the first to transport Bakken crude by rail to refineries that were closing on the East Coast and could not process heavy overseas crude without undertaking major investments.

Houston-based small-cap Goodrich Petroleum Corporation (NYSE:GDP ) is also being undervalued, with its stock shorted significantly. Operating primarily in the Tuscaloosa Marine Shale in Eastern Louisiana and Southwestern Mississippi, Goodrich is the fourth most shorted stock on the NYSE with short interest of 48.55%. At the same time, it has outperformed performance benchmarks.

Other explorers and developers banking on higher-risk wildcat drilling for probable reserves could offer investors massive reward as stock prices are typically highly undervalued until oil is actually found, and not closely tied to the price of oil.

One such junior oil and gas explorer, Virtus Oil & Gas (VOIL), recently acquired the mineral rights to what is known as the Parowan Project in Utahs Overthrust Regiona region known for its oil success stories. Last month, independent assessor Gustavson Associates revaluated Parowans resources and increased its estimated oil prospects by over 58%. The company is set to begin its test drilling in September 2015.

And as shale wells deplete faster than conventional wells, Virtus conventional drilling program may be even more attractive to investors who are increasingly reluctant to foot the bill for more expensive unconventional drilling in the current oil price slump.

Although no one can be certain that we have seen the bottom in regards to oil price, investors still can find opportunities by researching viable opportunities.

As Jim Oberweis. president and portfolio manager with Oberweis Funds notes, it is just a matter of time before small-caps, which have underperformed large-caps in recent years, will fulfill their historical posture of outperforming large-caps over the long run.

By. James Burgess of Oilprice.com

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