If you want to make money in oil stocks right now, make sure to ignore the government…

If you follow its rules, you’ll miss out on opportunities that can double your money in less than a year.

The U.S. government has a set of rules that dictate what publicly traded energy companies can claim as assets. While these rules are supposed to be well-meaning, energy insiders regard them as ridiculous. Knowledgeable insiders know the government’s rules prevent very real, very valuable energy reserves from being carried on a company’s books.

[ad#Google Adsense 336×280-IA]And if we ignore the government’s methods… and use the insiders’ instead… we can find some amazing deals in the oil sector.

Two recent mergers show this idea at work…

Norwegian oil major Statoil (NYSE: STO) recently bought smaller operator Brigham Exploration (NASDAQ: BEXP) for $4.4 billion. Brigham operates in the huge Bakken shale deposit in North Dakota. The buyout was a 20% premium to its previous day’s closing price.

Brigham has “proved” reserves of 66.8 million barrels. I highlight “proved” because the Securities and Exchange Commission (SEC) only lets a company call undeveloped shale reserves “proved” if they are in production. But any petroleum engineer with half a brain will tell you the company owns a lot more oil than that…

We know Brigham has 794 undrilled well locations. Engineers say each of those wells is likely to produce 600,000 barrels of oil over its life. That works out to an un-SEC-approved volume of 476 million barrels of oil… more than seven times the SEC-approved total.

This unapproved total is what Statoil was looking at when it bought Brigham… which resulted in a purchase price of about $10 per barrel.

Another example: On Sunday, October 9, giant Chinese oil company Sinopec (NYSE: SHI) shelled out $2.1 billion in cash for Daylight Energy (TSE: DAY), a Canadian explorer. That was a 120% premium over the previous day’s closing price.

Daylight trades in Canada, so it can report both “proved” and “probable” reserves… a much more sensible method for evaluating unconventional oil and gas in the ground. It reported reserves of 173.3 million barrels of oil equivalent. That means Sinopec paid about $12 per barrel for those reserves.

We can use these buyouts to get a rough range for what companies are paying for reserves right now… around $10-$12 per barrel. And if we buy great resources for much less than those values, we can make a lot of money in the coming years…

One of my favorite companies that fits this mold is Continental Resources (NYSE: CLR). It’s a $10.5 billion oil company focused in the Bakken shale and the Anadarko/Woodford basin in Oklahoma.

It’s an industry leader in oily, unconventional shale plays. That means it’s completely misunderstood by Wall Street. Its formal “proved” reserves, according to the SEC, are 421 million barrels of oil equivalent. It appears to be priced at $25 per barrel.

However, oil insiders know this company has 2.22 billion barrels of oil equivalent waiting to be drilled. Its actual price is $4.75 per barrel. That means we could see 100%-150% upside to the current market price of $10-$12 per barrel.

That’s my favorite example. But there are many others out there right now. Bigger oil companies know they can quickly add reserves cheaper through a buyout than by exploring and drilling themselves.

If you follow those two simple metrics, you could find yourself up 100% or more on the next acquisition… or at least owning a pile of cheap energy reserves.

You just have to ignore the government.

Good investing,

— Matt Badiali

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Source:  The Growth Stock Wire