The Oil and Gas Investor just handed out a cheat sheet for finding the cheapest oil and gas stocks out there… if you knew what you were looking at.

The leading industry journal just published a “lending scenario.” It looked at 41 banks that lend money to the oil and gas industry and crunched the numbers. It found that, on average, banks are willing to lend energy companies $100 million to buy other companies with 7 million barrels of reserves. That works out to $14.28 per barrel.

That gives us a great benchmark to measure how cheap or expensive an oil company is. It’s a better reflection of the deals going on in the energy market right now than just looking at public stock prices.

I’m not saying we should look for companies that are going to get bought out… But we sure don’t want to buy a company at a premium to a reasonable takeover price. That’s like paying more than the sticker price on a new car… It’s just stupid.

[ad#Google Adsense]With this in mind yesterday, I created a list of 105 U.S. and Canadian-listed energy companies between $500 million and $40 billion in market value and ran them against the lending scenario…

I only found FOUR companies that qualify as cheap right now… The recent climb in oil prices has made most stocks too expensive to safely buy.

And those four were cheap for a reason. They all had large warts on them. Take Harvest Natural Resources, for example. Ninety-one percent of the company’s reserves are located in Venezuela. Venezuela is run by a private-property-hating madman. No thanks.

So does that mean there aren’t any deals to be found in the energy sector? Absolutely not. You see, the lending scenario had me jump through an extra hurdle… It stipulated companies whose reserves were at least 60% oil and 40% or less natural gas. Because oil prices are high and natural gas prices are low, banks would rather lend money against companies with lots of oil reserves.

But investors should be looking for the exact opposite.

The best time to buy resource companies is when everyone hates the resource. The fact that banks only want oily companies is bullish for natural gas. The availability of bank loans has pushed the market toward oil. We’d rather buy what the market hasn’t already fallen in love with… which is natural gas.

And if you throw out the 60% oil requirement, you suddenly find a ton of cheap, high-quality companies.

[ad#article-bottom]There are 30 oil and gas companies below the banks’ $14.28 per barrel cutoff. And one of the first companies in that “cheap” pile that caught my eye was ConocoPhillips. It’s well below the bank’s cutoff price, at $13.05 per barrel.

ConocoPhillips’ reserves are 56% oil and 44% natural gas. It’s a giant integrated oil company, with $25 billion in earnings last year. But because it has a slightly higher ratio of natural gas to oil, it’s selling at a discount to oilier companies. As natural gas prices rise, it will more than make up that discount.

That’s true of a lot of good, small, natural-gas-heavy companies today. You may have to hold them for two or three years… but you could see huge gains over that period. I’m happy to wait that long for a 200% or 300% return.

Good investing,

— Matt Badiali

[ad#jack p.s.]

* Source:  The Growth Stock Wire