One Of The Best-Positioned Micro Caps In The Market
By Martin Tillier - Aug 21, 2015, 4:37 PM CDT
With oil continuing its steep decline and now breaking through the psychologically important low from the depths of the recession in 2009, the qualities that investors should look for in an energy company have changed somewhat.
A conservative approach to expansion, which was punished in the recent past, is now looking like a smart move. Stock in companies with untapped reserves have been hit as oil has fallen, for sure, but some are beginning to buck the trend of oil’s collapse and level out, or even in some cases recover slightly. Synergy Resources (SYRG), a small, Colorado based exploration and production company would be a case in point.
The above chart offers a comparison between SYRG (the blue mountain chart) and the oil ETF OIL (the purple line). As you can see, while oil’s decline has continued, SYRG seems to have bottomed out. Relative strength such as that in a weak market is notable and justifies further investigation.
Synergy is focused on Colorado, specifically the Wattenberg field in the Denver-Julesburg basin, which brings some risk with it. The area is somewhat lacking in infrastructure and pipeline capacity for example, which may explain the more cautious approach. It also involves utilizing a type of drilling that is relatively new and thus unproven. What has presumably sparked the interest of investors, however, is that the company has eschewed rapid organic growth in the last couple of years and had instead focused on…
With oil continuing its steep decline and now breaking through the psychologically important low from the depths of the recession in 2009, the qualities that investors should look for in an energy company have changed somewhat.
A conservative approach to expansion, which was punished in the recent past, is now looking like a smart move. Stock in companies with untapped reserves have been hit as oil has fallen, for sure, but some are beginning to buck the trend of oil’s collapse and level out, or even in some cases recover slightly. Synergy Resources (SYRG), a small, Colorado based exploration and production company would be a case in point.
The above chart offers a comparison between SYRG (the blue mountain chart) and the oil ETF OIL (the purple line). As you can see, while oil’s decline has continued, SYRG seems to have bottomed out. Relative strength such as that in a weak market is notable and justifies further investigation.
Synergy is focused on Colorado, specifically the Wattenberg field in the Denver-Julesburg basin, which brings some risk with it. The area is somewhat lacking in infrastructure and pipeline capacity for example, which may explain the more cautious approach. It also involves utilizing a type of drilling that is relatively new and thus unproven. What has presumably sparked the interest of investors, however, is that the company has eschewed rapid organic growth in the last couple of years and had instead focused on strengthening their balance sheet. That has left them in the enviable position of being able to look to acquire new leases now that prices are depressed, and that is what management has indicated they intend to do.
In essence this is a miniaturized version of the strategy that the large, multinational, integrated firms have been employing for decades, if not centuries. They don’t necessarily cut production when the commodity price falls; rather they slow plans for expansion and set about quietly acquiring assets. To do so, of course, requires some financial strength. What is unusual about Synergy for a small E&P company is that they have that. They actually have more cash on hand than outstanding debt, a rare thing indeed in the sector at the moment.
They are, then, a company that seems to have bet on lower oil prices, or at least allowed for the possibility, and are now positioned to benefit from that planning.
If the timing of their acquisitions is as good as their timing in that respect has been, they will be in a great place to ramp up production when and if prices begin to recover. The stock’s divergence from the price of oil in the last month or so indicates that the market is aware of that and makes SYRG a less risky way to bet on that outcome than most others.
