With prices steadily hovering around $100 a barrel, it?s no wonder that investor interest is piqued by oil stocks. Despite all of the current interest in developing alternative sources of energy, fossil fuels are still the primary energy choice of developed economies and will continue to retain their first-tier position so long as there are exploration and drilling companies willing to exploit new technologies, such as horizontal drilling, to reach untapped reserves. Extraction activities continue both offshore and onshore at a steady pace, and while the major oil companies show no signs of slowing down their operations, their efforts are matched by the numerous small-cap oil firms looking to make their mark in the fossil fuel arena. With so many choices to pick from, how will you know which oil penny stocks are the best investment candidates?
While all penny stock opportunities should be thoroughly researched before an investor commits his funds, an investment in oil stocks requires a particular type of due diligence. Unless the target company is involved in the oil sector in an ancillary way (such as pipeline engineering and construction, drill and rig parts or distribution of crude), the first step in vetting a prospective investment in an oil company is to ensure that the company has the rights, through either ownership or long-term lease, to carry out exploration activities in its designated location(s). In addition, the company should be in possession of geologists? reports confirming that reserves sufficient to merit the investment of capital and labor into the endeavor are present, and the company must also be able to demonstrate that they are in possession of all permits and licenses necessary to operate legally. If all three of these crucial items are not in place, retail penny stock investors should not consider getting involved with the company.
Assuming that the legal and geological bases of doing business are properly in place, it?s prudent to have a thorough look at the company?s finances. Oil companies have a high need for capital as a matter of course, since the costs associated with both offshore and onshore drilling are extremely high; any serious investment candidate must be able to demonstrate that they have sufficient cash on hand, or access to cash through committed financing, to fund at least a year?s worth of operations, because current shareholders will find their value diluted if the company must issue additional stock to raise money for continued exploration. Look for companies that have more than one lease, or that are drilling in more than one location, in order to increase the chances of a rise in revenue and value; ideally, look for companies that have already generated positive results through operations in one location, and are diversifying by expanding operations to include additional locations. Such firms will be the first of the small-caps to benefit from momentum trading as the price of oil continues to rise.
Because the price of oil stocks is so highly influenced by external economic factors, knowing when to get out of your position is of exaggerated importance when investing in oil penny stocks. In general, look for moments of opportunity occurring after spikes in barrel prices, however, more specifically, if you?ve had the good fortune to invest in an oil stock that strikes it big, consider selling as the stock price approaches resistance levels: the chances of the same company hitting it big twice are just too slim. As an alternative, you can always invest in an energy-heavy ETF or mutual fund, but there?s really no reason not to take a gamble on a penny oil stock or two: the buy-in is relatively inexpensive, and the payoff can be significant.
Oil penny stocks are issued by all sorts of companies involved in exploration and drilling. Between those that drill onshore and those whose operations are located offshore, those whose efforts are concentrated on new fields and those who specialize in extracting reserves left behind after the majors have moved on to greener pastures, there?s something for everyone. As emerging economies such as India and China continue to build wealth, needing even more cars and energy, the need for oil will correspondingly continue to increase; surely, among all of this activity, there?s an oil penny stock or two that?s a perfect fit for your risk profile and your portfolio.
Source: http://www.pennystocks123.com/stock-market-tips/investing-in-oil-penny-stocks.html
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