Despite a tough year in oil markets, a handful of small-cap energy stocks have seen year-to-date returns of up to triple-digit percentages. But finding these winners in a sea of mediocrity isn’t easy.
In a steep reversal from last year, small-cap stocks have been lagging behind their brawnier brethren this year, making it harder to pick winners. The Russell 2000 - which tracks small-cap stocks - is up only 13.6 percent in the year-to-date, compared to a 19.3-percent gain by the broader market index, the S&P 500.
Lower margins and less pricing power have been preventing smaller companies from weathering the effects of trade tariffs as effectively as large caps, thus putting a ceiling on their growth prospects.
The story is even more dire for small-cap energy stocks.
Greater-than-anticipated U.S. shale production, as well as a stuttering global economy, has put a damper on oil prices despite drone attacks on Saudi oil fields triggering the biggest supply disruption in history.
Small-cap oil stocks tend to be more sensitive to oil price swings than bigger companies, which also means they can have more leverage when times are good.
But in the current atmosphere, this means that many exemplary performers last year have badly underperformed this year.
Nevertheless, there are a few that have been outstanding in a sea of mediocrity. Here goes:
#1 CGX Energy Inc. (OYL): Sitting in the middle of the world’s next biggest oil play
Market Cap: 164.86 million
YTD Returns: 219%
CGX is a Canadian oil and gas exploration company.
The company holds three licenses in the Guyana-Suriname Basin with a proven hydrocarbon system and prospective deep-water plays. The United States Geological Survey (USGS) has identified the basin as having the second-highest resource potential among the world’s unexplored basins with an estimated mean recoverable resource potential of more than 13.6 billion bbls of oil and gas reserves of 32 trillion cubic ft. Related: Dreams Of An Aramco IPO Are Fading Fast
CGX is surrounded by oil majors such as Apache, Exxon, Anadarko, Kosmos, Inpex, Repsol, Murphy, Total, Tullow, Shell and Statoil.
Nevertheless, the company is yet to report any revenues and remains a speculative play at this juncture. It’s also worth noting that the company’s liabilities exceed net cash by about $56.5 million making it a high-risk play.
Still, the shares could have serious upside if the company strikes oil.
#2 Pedevco Corp. (PED)
Market Cap: 72.7 million
YTD Returns: 88.8%
Source: CNN Money
Colorado-based Pedevco Corp. is a company that deals in the exploration, development and production of unconventional oil and natural gas. In September 2018, the company finalized the acquisition of over 23,000 acres for exploration and production from Hunter Oil, which has proved a blessing for the shares.
PED shares have a beta value of just 0.92, which is unusually low for a small-cap. This implies the shares are less volatile than the average small-cap.
#3 Torchlight Energy Resources Inc.(TRCH)
Market Cap: 66.8 million
YTD Returns: 40.0%
Source: CNN Money
Texas-based Torchlight Energy Resources is a high-growth oil and gas Exploration and Production (E&P) company. Its chief objective is the acquisition and development of highly profitable domestic oil fields. Their targets are established plays such as the Eagle Ford Shale and the Permian Basin. Investors have been particularly excited by the company’s Orogrande Project, which it bought on the cheap - ?$20 per acre - back in 2014. Related: Trump’s Latest Trade War Move Sends Oil Tanking
The company’s growth metrics are a mixed bag: Earnings have grown an average by 113 percent each year over the past three years but revenue has declined nearly 30 percent during the first six months of the year. The company is also highly leveraged with a debt-to-equity ratio of 76 percent. Investors are therefore advised to keep a close eye on the company’s balance sheet to determine whether it can survive another downdraft.
#4 Vaalco Energy Inc. (EGY)
Market Cap: $118.2 million
YTD Returns: 39.5%
Source: CNN Money
Vaalco is an American oil producer that focuses primarily on West Africa. The company is a small oil producer offering significant potential growth opportunities. The company’s sole dependency on one producing field - Gabon’s Etame Marin - makes it a rather risky play.
Nevertheless, Vaalco seems to be on the right track after recently confirming oil sands at the Etame appraisal well in offshore Gabon. EGY’s management revealed that the first well of its three-well campaign was successfully drilled to a total depth of 10,260 ft.
The important thing to remember about small-cap oil and gas companies is that their shares can surge in a second with a discovery or a move into the development. Of course, they can also plunge just as quickly if a drill turns up dry, leaving investors holding the bag. The amount of debt it takes to drill is crippling for a small-cap, but that’s why when they win, they win big.
By Alex Kimani for Oilprice.com
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