Mark Perkins sends: I took a pretty good look at cheap oil stock HKN (HKN) last year. The stock was selling at a substantial discount to its tangible assets.

Right now HKN has $24.2 million in net current assets and investments. $14 million of that is in cash and marketable securities. These are the most liquid of a firms assets. In other words they are easily converted to cash in say a bankruptcy. HKN has a market cap right now of $20 million so it selling for less than that $24.2 hard figure. Well, that in itself is not that special. Those assets could erode and our metric of value could be worthless. But if you consider everything about this company and the likely rise in oil over coming years it is interesting.

The interesting thing about HKN though is they are cash flow positive right now in the first quarter of 2009. With oil prices likely to rise from all the money printing nations are doing these days not to mention the rising demand from Asia and India I’m not sure the asset valuation on HKN makes any sense here. It really isn’t good though they are not profitable as they just posted a $1 million loss.

HKN has no debt and they are saying they will have plenty of capital from operations for cap ex and capital needs. Also,

During the three months ended March 31, 2009, we repurchased 500 thousand shares of our common stock for $1.3 million from a shareholder in a privately negotiated transaction pursuant to our repurchase program. During the three months ended March 31, 2009, we retired approximately 507 thousand treasury shares. As of March 31, 2009, approximately 737 thousand shares remained available for repurchase under our repurchase program.
-May 2009 Press Release

I’m going to go on maybe a bit of a stretch here and say that it is a sure thing that we will see higher oil prices in the next couple decades. The next year I don’t know but over the coming years if there is any prosperity in this world oil is going to rise on demand alone. Not to mention oil is a non-renewable resource. Unless governments mandate the use of strictly alternative energy sources of power oil is surely to reach previous bubble heights of $100 barrel plus.

Technically, HKN has stopped trending downward as it has broken above that previous high just below $2. It successfully retested it and bounced off to trade where it is now around $2.30. It has important resistance coming here as I drew with that smallest red line. If it can push above that resistance it will have taken out pretty big resistance that is that previous support from late December through early February. I think this stock is a buy if it can break through $2.50.

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Disclosure: No position.

Mark just did a quick review of a cheap discount broker that lets you buy penny stocks Zecco