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Blog : Penny Stocks and Oil's $50 Tipping Point
November 10th, 2008
I don't expect to see $50 oil, and in fact I recently stated that we wouldn't likely see $60 oil either. (See my October 20th blog)
However, if the economy slowed down enough, perhaps oil
prices would collapse towards that $50 threshold, and a lot of interesting
things would happen. There would be some penny stocks that would benefit, and some penny stocks that would take quite a hit. Consider this:
The Green Movement: $50 oil will kill the green movement. Solar, wind, hydro, clean coal, even nuclear
can not compete on price when it comes to $50 oil. One day green energy sources will come closer
in cost competitiveness, but we are many, many years away from that point. At $50, oil will be too cheap for other
energy sources to compete. The result
will be consumers and companies turning back to oil (or staying with oil) to
save money. The Green Movement will be a
casualty of such a situation, as would any penny stocks involved in the clean energy market.
Cost of Production: New methods to reduce oil production costs will need to be sourced and implemented. Most wells will not be able to stay active, especially those of small producers, most of which are penny stocks. Those that already have a low cost of production may be able to stay afloat if they get their expenses down even further. For many well operators, it costs close to $50 just to produce a barrel of oil. There isn't a lot of room for profit when the cost of goods is equal to the selling price.
Operating Wells: There are many currently active oil wells that are feasible businesses as long as oil prices cooperate. At $50 / barrel, these wells would be operating at a loss. They then need to scale back, or perhaps cease operations temporarily (and potentially permanently).
Exploration: Pro-forma production and profit estimates will clearly show that the costs and risks associated with most exploration programs are too great. It will be hard, even with optimistic estimates, to justify new exploration activity.
In addition, it's less expensive for larger players to
simply acquire currently producing wells, rather than to explore for new
supplies. This will further reduce new exploration
activities, but might give rise to an increase in penny stocks in the sector being acquired.
Like I said, I don't expect $50 oil. However, if such a day comes to pass, you may want to:
- avoid any clean energy penny stock companies, because they will likely be taking major (and potentially disabling) hits to their revenues
- avoid penny stock oil producers, especially the smaller ones (unless they are cash rich, debt free takeover candidates)
- avoid exploration companies, or those that are in the exploration stages
- look for penny stocks that help producers lower costs, or increase efficiencies
- look for transportation, airline, and logistics penny stock companies, who really benefit from low fuel prices
Of course, if we ever do really get to $50 oil again, it would likely only happen if the economy was in tatters. So, let's root for the economy, and let's root for oil to stay high.