Trading Energy Stocks

Keith Kohl

Written By Keith Kohl

Posted February 23, 2009

I can vividly remember the day I bought my first stock.

At the time, I was just a young kid starting college. It was mere seconds after the market opened that I decided to strike. I was so sure that this was the play. The nervous anticipation making my fingers shake over the keyboard. It wasn’t fear that gripped me at first, it was a feeling of power. I was in full control of my financial destiny.

It turns out that same confidence blindsided me. In fact, I wish I could sit here and tell you this one trade freed me of all my debt and set me down the road to greener pastures. Unfortunately, that wasn’t the truth, and there’s a good reason why.

Within the first ten minutes of making this trade, however, I was already regretting it. The minutes turned into hours. Then, things got even worse. At one point during the day I had to stop watching the company while the share price dropped. I’d had enough of the market that day as the pit of my stomach grew heavy with regret.

I felt crushed when I decided to cut my losses and run. I was so sure this was my ticket, I was blinded against logic. As you can probably tell, my first foray into the world of trading didn’t turn out the way I imagined. Sadly, I had fallen into the same trap that many of you, at one point, may have found yourselves in, too. The problem was I failed to do my own due diligence.

It’s a mistake, though, I haven’t made since.

Finding the Right Energy Stock

Understandably, everyone will have his or her own personal ways to approach a potential energy trade.

So let me ask you: What do you look at before adding a company to your portfolio?

I’ve met several Energy and Capital readers who swear by trading strictly on the company’s chart. They’ve often said they prefer to live or die by the Bollinger Bands. Granted, using the BB bands is an effective way to gauge volatility, but using them as the sole indicator is something I’d hesitate to do. I don’t see the point in limiting your analysis like that.

On the other hand, I’ve read numerous success stories you’ve sent in (naturally, I’m not surprised by my readers’ trading success).

Considering it would take hours to go through everything, I’ll go over the first things things I look for when identifying a specific energy company. I ask myself a three simple questions.

1. Where are they operating?

First and foremost, I need to know where my company is operating. Depending on the answer, I’ll know whether or not to move on to something else. Personally, I need to know whether or not the area has room to grow. Would you be comfortable putting your hard-earned money into a field like Cantarell?

Okay, that may not be a be a fair question considering Cantarell’s dramatic decline over the last several years, but you get the point.

On a domestic scale, take a closer look at North Dakota. The state’s production has been growing steadily for the last seven years—one of the few states where oil production is actually increasing. Of course, North Dakota’s oil boom isn’t new to my readers.

2. What is their growth potential?

Once I’m sure my prospective play is operating in the right area, the next question is where the company is set to go from here. How much production is the company pumping out? More importantly, where is that amount headed? Understandably, that has a bit to do with where the company is operating.

For example, let’s take a quick look at natural gas. To take a long position in natural gas, you would lean toward prospective shale areas like the Haynesville or Marcellus shale, where production is expected to jump over the next five years. If you’re looking for more stable production, you’d probably focus on companies operating in the Barnett shale.

3. The final question

It’s the question I always leave until the end. I simply ask myself, "Would you be comfortable owning this company five years from now?"

There’s a good chance that if I’m not comfortable holding onto a company for that long, the risk may be too great for me. On top of watching my gains, it’s satisfying to watch one of your energy plays grow over time. Imagine picking up a small oil producer five or six years ago. I bet that company would have made you (and your wallet) smile during oil’s run to $147 per barrel.

Looking Forward…

That final question always makes me think back on my first trade. A few years and several trades later, I bought back into that small energy company after evaluating their potential. The difference, however, was that I had come to the decision after a long series of research. This time I not only came out ahead, but also erased the previous loss.

As you’ve probably realized by now, there is a huge buying opportunity in this market. And the fact is many quality companies out there have had their shares unfairly beaten down. Believe me, dear reader, those opportunities are not only out there, they’re right in front of our faces. Don’t believe me yet? Next week, I’ll show exactly which energy stocks to add before oil rebounds and we move out of this recession.

Until next time,

keith kohl

Keith Kohl

Energy and Capital

P.S. Like many of you, I don’t get frustrated during a recession. The reason is simple. Can you honestly think of a better time to pick up a solid company? Finding those gains, however, isn’t easy. Many of my readers are taking advantage of the situation by picking up those oil and gas gems right now. Personally, I think it’s time you joined their success. Simply click here to find out more about the Pure Energy Trader.

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