Profit When Oil's Have-Nots Crash

It's getting easier to separate the haves and the have-nots in the oil and gas sector.

Well, at least it was before the threat of regional war in the Middle East sent the share prices of just about all oil producers running higher, along with the price of a barrel of oil.

But once the region settles back down to its now unfortunately normal state of grinding small-scale slaughter, the basic trends in the industry will again come to the fore.

And you should be looking through the current disaster to own the long-term winners. It doesn't hurt that these same stocks should do well in the short term from financial markets' Middle East fears.

Long-Term Trends

The have-nots are in a panic. These companies haven't been finding enough new oil and gas to replace what they pump. They're afraid of losing significant portions of their existing reserves to political upheaval in unstable regions -- if they haven't lost them already. And their portfolios of new projects don't promise to add enough reserves to make up for the shortfall. They'll pay almost any price to acquire more oil and gas.

The haves are sitting on their hands. They've been able to replace what they've pumped, and more, in recent years. The bulk of their existing reserves are in relatively stable regions. And most importantly, they've been successful enough at exploration and development to line up a portfolio of new projects that promise to keep production growing over the next decade.

If everything works out as they plan, the have-nots will survive and even profit from their current strategies of desperation. But the risk is high -- oil and gas profits in the near and long term have to be "just right." If not, some of these have-nots will wind up selling assets, if not their entire companies, at fire-sale prices.

The Strategy of Doing Nothing

Who will be there with armfuls of cash if that happens? The oil companies that have the luxury of doing nothing right now -- except count the cash as it comes flooding in. These companies' do-nothing strategies are, in fact, a bet that some of today's aggressive dealmakers will blow up, leaving the companies that have hoarded their cash to pick up the pieces at 50 cents on the dollar.