Gulf Keystone Petroleum (LSE: GKP), Falkland Oil and Gas (LSE: FOGL) and Xtract Resources (LSE: XTR) are three of the market’s most controversial resource stocks. But if you’re willing to take on the risk, here are three reasons why now could be the time to buy.
High-quality assets
Firstly, Gulf Keystone, Falkland and Xtract all have high-quality assets that will help drive their growth over time. For example, Gulf Keystone’s investors received a huge confidence boost last week, when the company announced that estimates for proven reserves at the company’s flagship Shaikan field have been upped by 55% since March last year to 306m barrels gross. The proven and probable reserves figure was increased from 299m to 639m barrels gross.
What’s more, Gulf Keystone’s production costs are some of the lowest in the industry. Last year the company stated that trucking Shaikan crude to the Turkish coast, storing and loading it costs circa $23 per barrel.
Falkland isn’t producing any oil yet, but the company’s prospects in the Falkland Basins have plenty of potential. Falkland’s 18% share of the Sea Lion complex totals around 102m barrels of oil. It’s believed that the Sea Lion prospect, owned by Falkland’s regional partner Rockhopper ,will be producing an estimated 60,000 barrels of oil per day within five years. Recent discoveries indicate that Falkland could be set to benefit from similar growth.
Xtract’s Fair Bride acquisition has revolutionised the company’s prospects. The deal has cost the company $12.5m, although it’s estimated that the project will pay for itself within three years. What’s more, initial figures indicate that the project will generate a net cumulative cash flow of $82.4m. During the past six months, Xtract’s resource base has increased by 3,233% from 30,000 ounces of gold to over 1m ounces.
Touching the lows
As the saying goes, “the time to buy is when there’s blood in the streets.” Gulf Keystone, Falkland and Xtract are all currently trading at four-month lows, as investors have turned their backs on the companies amid market turmoil.
This presents an opportunity for the thick-skinned investor who is willing to take on the risk.
Risk/Reward
All of these companies offer attractive risk/reward profiles. If everything goes to plan, their shares could double, triple or quadruple from present levels.
Xtract’s shares have already doubled since the beginning of February and Falkland could return to its all-time high when the company finally starts producing oil. This indicates a gain of more than 1,000% from present levels.
Your own risk profile
The decision of whether to buy Falkland, Xtract and Gulf Keystone should be based on your own risk profile.
These companies certainly aren’t for widows and orphans, and if you’re concerned about taking a total loss, it might be time to get out. However, if you’re willing to take on the risk, for the prospect of huge gains, now could be the time to buy.
And if you do decide to buy, the best strategy would be to use a basket approach.
