Do you believe in oil?

By Travis Johnson, Stock Gumshoe, October 2, 2008

The falling price of oil, combined with the massive deleveraging going on among investors everywhere, is really causing smaller oil companies to take it on the chin. It is starting to look like IF the world is going to return to “normal” in the next couple years, there are several companies that might be compelling buys if you can hold your nose.

One of those that catches my eye is Dragon Oil, the recent tease-ee of Christian DeHaemer at the Crisis Trader newsletter. He’s been talking about this one for a while, though only teasing it fairly recently, but he has apparently liked it from prices that were at least twice the current levels. I wouldn’t tell you that he’s particularly good at picking price points, and in all honesty I’ve been awful at that myself of late, but there are some fundamental underpinnings for Dragon Oil that make it possibly worth a look:

It’s trading now below $3, and though they will probably take a hit to earnings from falling oil prices and from capital investment in pipelines and related infrastructure, they are producing a lot of oil in the Caspian, and they are profitable. If they were able to maintain the earnings run rate of the past six months, the PE ratio would be 5. That doesn’t mean the price can’t go down, and there are dramatic political risks as well as commodity risks with this company, and it is controlled by a national oil company, so it should be cheap — but I don’t know that it will remain this cheap forever. The teased returns of 30,000% are clearly ridiculous, but it could well be an interesting deep value bet in the near future.

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