Extrapolation is non-linearLTS and many other high-leveraged players in the space are priced for bankruptcy or close to (massive dilution, low-ball takeover, etc.).
If oil goes back to $100 (thought experiment), all these stocks would not go to $1 or $1.5, they would go to $5-$10. Maybe not LTS as it is so badly run and have shown constant mishaps on the operational front. Can't wait for that Fahler "high impact" well to underperform...
In any case, my point is that linear extrapolation is really not the way to go here. Look at PWE, the market suddenly perceived them as "out of danger" after the latest asset sale and the stock doubled in a week.
The perception of bankruptcy is what is keeping LTS, MEI, PWE (until last week) in the dirt cheap category. That perception changes and you will have flyers in your portfolio.
If you believe in that strategy, you should buy several names that you suspect would rebound massively if oil were to make a move up to $70. Pick names that should be able to survive a two year slump just in case. LTS might not be the best. PWE was clearly a better name. After their repricing, not sure.
In the recent months, I loaded up on Surge and Lonestar Resources. Surge was somehow priced as if it were in distress. I also bought ECA and CLR among the bigger players, also high leveraged players that got completely hammered in the last year. It was the opportunity of a lifetime in my mind.
In the last week, I diversified and got bullish and bought LTS, MEI and PWE. Now, this is my "speculative" portfolio and one of them may fail. My strategy is that the other two will heavily compensate for it, plus all the others. I am well aware that buying an oil stock with equity being completely underwater could yield a 100% loss on the position. That's why I am diversifying.
What other stocks might qualify? I would consider BXE for instance. But overall, I would prefer oil to nat gas stocks.
One last thought, I hear posters saying it is "impossible to see oil go up above $60 in the next two years." Well, it was impossible for oil to go below $70 even a year ago...futures curves are notoriously not good at predicting future oil prices. It is all about perception. And perception can change quite quickly. Right now, everybody thinks there is a world wide glut. And there is. But the ME is in crisis. The Saudis are pumping like nuts and spare capacity is thinning. There are has been almost no new major discovery in the last two years (relative to the past). Major projects have been stopped, etc. etc. At some point, perception can and will change. We are not there yet...but two years is a long time. I loaded up on these washed-up names...I am very underweight LTS because of poor management but within a portfolio of distressed oil stocks, it has its place. GLTA!