The energy sector was booming in 2018, sending oil stocks higher. However, as the trade war between the U.S. and China continues to dominate the headlines in 2019, the global economy has slowed.
As a result, companies have decreased their business investment and spending, leading to crude oil prices trading in the 50s. The stock prices of oil companies, including penny stocks, have taken a hit in 2019. Oil producers, drilling companies, and service companies alike have struggled to adjust to the recent glut in crude supply and declines in demand.
- The slowing global economy and the persistent trade war between the U.S. and China have led companies to cut their business spending.
- Crude oil prices have fallen to the 50s in 2019 but could make a rebound if the trade war is resolved and the economy rebounds.
- The top three crude oil penny stocks—those that might have a chance to bounce back amid a favorable economic backdrop—include Petro River Oil Corp. (PTRC), Bellatrix Exploration (BXE), and Granite Oil Corp. (GXOCF).
Understanding Crude Oil Prices
From the chart below, we can see the price of crude oil has declined significantly since 2018. The chart is courtesy of the U.S. Energy Information Administration (EIA) and shows both real prices (adjusted for inflation) and nominal prices (not adjusted for inflation) for crude imported into the U.S.
The $50 level appears to be a make-or-break zone where the price has crossed in 2015, 2017, and 2018. In recent years, only in 2016 did crude remain below $50 for an extended period.
The pressure on oil prices is likely to continue if there is weak demand for crude. A good indicator of the price of crude oil is the level of crude stocks or inventory, as shown in the chart below. Crude inventories began rising in September of 2019 (blue line) due to weak crude demand, too much supply, or some combination of both.
If inventory levels continue to rise, it's likely to put downward pressure on oil prices or at very least prevent them from rising significantly. Although demand for oil still exists, there needs to be a change in the overall market to use up the excess inventory, either through an increase in demand or cuts in production.
The EIA forecasts in its October 2019 Short-term Energy Outlook that U.S. crude oil production will average 12.3 million barrels-per-day (b/d) in 2019, which is higher by 1.3 million b/d from the 2018 level. The EIA also expects production to rise by 0.9 million b/d in 2020 for an annual average of 13.2 million b/d.
If production is higher and growth in the economy is slow, crude oil prices might have difficulty rising until macroeconomic conditions improve. However, if the trade war ends, it might lead to a ramp-up in oil demand as the global economy recovers and resumes its typical spending patterns.
The energy sector has paid a median tax rate of 36.8% for the last 11 years; the tax rate is now 21%, which frees up capital that can be used for maintenance projects and growth.
Top 3 Oil and Gas Penny Stocks
The low-priced energy stocks outlined below have survived the oil slump, despite their stock prices getting hit hard. If the economy and oil prices improve, these three stocks might see a rebound.
However, investors should be cautious in dealing with these so-called "penny stocks" since they typically have a much higher risk of loss than larger, more established companies.
1. Petro River Oil Corp. (PTRC)
The stock price for Petro River Oil saw a dramatic drop from $1.45 in August 2018 to where it now stands, as of October 2019, at $.14 per share. The company develops oil internationally with a presence in Oklahoma, California, Ireland, England, and Denmark.
Petro River Oil uses 3D seismic analysis to find oil resources. The company has shown increased cash reserves in the past several quarters, so it could be in a position to acquire assets to take advantage of higher oil prices.
- Average volume: 56K
- Market cap: $2.55 million
- P/E ratio (TTM): N/A
- EPS as of July 2019 (TTM): $.09
2. Bellatrix Exploration (BXE)
The Canadian oil and gas company is focused on the Western Canada Sedimentary Basin. As oil prices have slid, Bellatrix stock has slid over the last year, falling from $7 per share in early 2019 to its current price of $.38 per share. The company is expected to post a per-share loss in the near term. However, the stock—and the company—could be primed for a comeback.
Bellatrix is expected to grow profits by nearly 70% over the next few years with higher cash flows expected and higher valuations for the stock price. Nonetheless, analysts are a bit tepid on the stock.
- Average volume: 119K
- Market cap: $11.83 million
- P/E ratio (TTM): N/A
- As of March 31, 2019 (TTM): net loss $-19.17 million (CAD)
3. Granite Oil Corp. (GXOCF)
Granite focuses on the Western Canada Sedimentary Basin. The company last declared a dividend of $0.0075 per share in November 2018. Management has reduced costs significantly to make up for declining oil prices, and debt is relatively low. The fact that the company has not eliminated its dividend bodes well.
However, Granite's stock price has fallen over the last year from $1.40 to around $.3930 per share. This is one to watch to see if it turns around.
- Average volume: 34K
- Market cap: $15 million
- P/E ratio (TTM): N/A
- EPS June 2019 (TTM): $0.05
How Can I Buy Oil As An Investment?
The Bottom Line
There is a saying among investors, "a rising tide lifts all boats." But the rising tide of oil prices will not lift a leaky boat. Penny oil stocks on this list have seen better days. They are not startups; they are has-beens.
In other words, these plays are for those who see significant odds that the companies can turn around. To be sure, the drop in oil prices was not the fault of any of these companies, but that does not change the fact that they will have to make some quick moves to reverse their financial fortunes.