Oil prices have been moving higher since February 2016 when they reached a low of $26 a barrel. In 2018 the WTI spot price has remained within $60 to $80, a relief for oil companies but still far off of July 2008 highs of $145 per barrel. Forecasters expect oil prices to remain in this range through 2019 potentially pushing just above the $80 mark.
The improvements in oil prices have helped many oil companies and the industry in general. (See also: The Industry Handbook: The Oil Services Industry) While the sector continues to remain highly dependent on the decisions of OPEC and the output of top producers Russia, Saudi Arabia, the United States, Iraq and Iran – there has been a great deal of improvement in returns from oil industry stocks. This is also providing for increased optimism and greater opportunity in the small cap segment of the market. A lower corporate tax rate instituted in 2018 by the Trump Administration is also helping the sector and U.S. corporations overall.
As of October 2018, the energy sector’s stabilizing oil prices and the market’s lower tax rates have helped to make the energy sector attractive once again. As such, many speculators are turning to the energy sector for both value and growth. Through the first half of 2018, fund flows into the SPDR Select Energy ETF (XLE) were positive at $390 million. In addition to looking toward the large cap conglomerates such as those in the XLE ETF, many investors are also willing to take on slightly more risk in the sector by looking at small caps as well. Emerging small-cap companies can offer a lot of potential for growth in the current market environment and also a lower market entry price.
Below we discuss the top three small cap oil companies screened by market cap below $2 billion, one-year return and operations primarily related to oil. Data is as of October 26, 2018.
Valeura Energy (VLE)
Valeura tops the small cap performance list with a one-year return of 868.89%. The stock trades at approximately $3.90.
Valeura is a Canadian oil company in the business of oil and natural gas exploration, development and production. Its primary business operations are in Turkey. The company has trailing twelve-month (TTM) revenue of $10.95 million with a gross margin of 54% and a three-year annualized revenue growth rate of -16%. On the bottom line, net income is -$13.5 million. The company has a P/S of 23 as investors appear to have confidence in the company’s steady revenue and high gross margin.
PEDEVCO Corp. (PED)
Pedevco is an oil and gas production company based in the U.S. The company is involved in in the exploration, development and production of oil and natural gas shale. Its primary business operations are in the D-J Basin in Denver, Colorado.
Pedevco has a one-year return of 447.95%. The stock trades at approximately $1.78. It has a market cap of $29.5 million.
Pedevco reports TTM revenue of $3 million with a gross margin of -61% and a three-year annualized revenue growth rate of -14%. TTM net income for the company is -$18.15 million. In September 2018, the company closed an acquisition of over 23,000 acres for exploration and production from Hunter Oil which has been helping the stock’s value.
Northern Oil and Gas (NOG)
NOG has a one-year gain of 308.24%. The stock trades at approximately $3.12.
This company is another downstream oil producer. Its primary operations are in North Dakota and Montana with key development areas in the Williston Basin.
NOG has TTM revenue of $226.7 million with a gross margin of 70% and a one-year revenue growth rate of 40%. TTM net income for the company is $53.56 million. Operating income has been a key driver for NOG’s attention. It has TTM operating income of $53.8 million with a one-year operating income growth rate of 234%.
The Bottom Line
The small cap sector of the oil market provides a variety of investment opportunities. In addition to the three companies above, the following seven companies also rounded out the top ten list of performance in the category:
Overall, energy stocks will likely continue to receive attention as oil prices continue to climb from $25 per barrel lows. Small-cap energy stocks offer an opportunity for investors to get into the energy sector with lower investments. Many of these companies are on the uptrend with positive momentum providing support for further continued gains as the sector’s valuations improve.