Do you want to make a lot of money investing in commodities? Then oil and gas producers are a great place to start. But odds are, you're probably not going to do it with global behemoths like Chevron (NYSE: CVX) and Exxon-Mobil (NYSE: XOM).
Don't get me wrong, these are both fine, well-managed businesses. They're arguably two of the most successful integrated oil and gas companies in the world. And they've rewarded stockholders well over the past couple decades. But yesterday's gains don't do today's investors any good.
I'm betting that Chevron and Exxon will have a harder time delivering outsized gains going forward. Because it's tough to fight against the law of large numbers -- and these companies are on the wrong side of it.
Chevron and Exxon each produce more than 2 million barrels of oil a day. When you're already pulling in that much oil, it's a challenge to maintain the same level of production -- let alone grow it. In fact, both firms reported a modest decline in output last quarter compared to the same quarter a year ago.
Believe me, it's not for a lack of looking. Exxon single-handedly shelled out $9.3 billion in capital expenditures last quarter and plans to spend $37 billion on exploration and development for all of 2012. Some of those investments will result in new discoveries, but every barrel will be needed just to offset normal production declines at older mature fields.
Even if the company succeeds in boosting daily production by 50,000 barrels per day (no small feat), that would only result in a tepid 2% increase. By contrast, developing new sources and pulling up an extra 50,000 barrels per day might boost production rates 100% or more for smaller producers.
Gulfport is an independent oil and gas producer with a $1.5 billion market cap -- roughly 100 times smaller than oil behemoths like Chevron and Exxon. The company's primary operations are focused along the Louisiana Gulf coast and the Permian Basin of West Texas, although it's actively hunting for oil in exciting new places like Ohio's Utica Shale.
One year ago, Gulfport's wells spit out approximately 6,200 barrels of oil and gas per day. As of last quarter, the company is now producing nearly 7,300 barrels per day. That's an increase of 1,100 barrels per day, 99,000 per quarter, and 400,000 per year.
While an increase of 100,000 barrels per quarter would be a drop in the bucket to oil majors like Chevron and Exxon, it represents a healthy 17% increase for Gulfport. That stronger product volume pushed the firm's revenues up 19% for the quarter to $66 million -- $3 million above Wall Street's target.
That superior growth helps explain why GPOR has been a standout in the energy sector and one of the market's shining stars. The stock has delivered an impressive 64% return over the past two months and surged 247% over the past three years.
That's why I steer my readers to small, independent producers. Unlike the big boys, it doesn't take a world-class discovery to move the production and reserve needles -- even small oil puddles can be converted into big paydays.
Of course, risk and reward usually go hand in hand. Smaller producers might have shakier balance sheets and less access to capital for expansion. They can also be more sensitive to commodity price fluctuations. But if you want to capture truly explosive gains, you have to withstand some volatility.
Action to Take --> Anything can happen in a day or a week. But over time, the giants will have trouble keeping pace with nimble companies like Gulfport. When you're less than 1% of their size, it's much easier to grow production, expand reserves, and swiftly raise profits.