The oil and gas industry includes companies involved in the exploration, extraction, refining, transporting and marketing of oil and gas products. An oil stock can include publicly traded companies which explore, drill and produce the commodities, such as ConocoPhillips (COP), those which provide the former with oil-field services, equipment, and other supplies, such as Schlumberger Ltd. (SLB), midstream companies that transport, store and process oil and gas, such as Enbridge Inc. (ENB), as well oil refiners and petrochemical companies like Phillips 66 (PSX), and integrated oil companies like ExxonMobil Corp. (XOM)
The oil and gas sector started 2018 off strong, coinciding with a rise in crude oil prices from around $50 to $70 per barrel. As crude fell below $50 a barrel towards the end of the year, stocks suffered, recovering again in 2019 alongside the broader market recovery and a jump in the price of crude near $54 per barrel. In 2018 and 2019, the oil and gas industry is expected to post strong profit growth. Expectations for a rapid increase in global energy demand, especially in India and China over the next few decades, should boost sales for oil and gas companies, although governments around the world are doubling down on renewable energy projects. According to Deloitte, in 2018, global oil demand looks likely to have breached 100 MMbbl/d for the first time, while natural gas continues to expand its share of key markets. While risks to supply persist in a few key exporting countries including Venezuela and Iran, the global economy is signaling continued growth, and energy demand is increasing at above-average levels, downside risks include commodity price volatility, tariffs, rising rates, an economic and market downturn, and broader uncertainty.
Here’s a look at the top performing individual oil and gas penny stocks as of February 2019, based on the sector’s performance since the start of the year. The list here is presented in order of year-to-date (YTD) performance based on the closing stock price, as of December 31, 2018 and closing price as of Feb 6, 2019. The performance has been compared to the SPDR S&P 500 Oil & Gas Exploration & Production ETF's (XOP) 13.5% gain in 2019. This list includes companies with market caps between $39.2 million and $909.8 million. The low-priced energy stocks we have featured below survived the oil slump, despite faltering, and may be positioned to continue their rebound as global demand for oil and gas boost revenues. However, investors should be cautious in dealing with these so-called "penny stocks,” given they are subject to greater swings in stock price and are riskier bets.
1. Torchlight Energy Resources Inc. (TRCH)
· Market Cap: $70.1 million
· YTD Stock Performance: 76.8%
2. Sanchez Energy Corp. (SN)
· Market Cap: $39.2 million
· YTD Stock Performance: 67.4%
3. Weatherford International Ltd. (WFT)
· Market Cap: $909.8 million
· YTD Stock Performance: 61.6%
4. Capstone Turbine Corp. (CPST)
· Market Cap: $61.7 million
· YTD Stock Performance: 53.7%
Torchlight Energy Resources
Plano, Texas-based Torchlight Energy Resources is a high growth oil and gas Exploration and Production (E&P) company with a primary focus on acquisition and development of highly profitable domestic oil fields. The $70 million company currently holds interests in Texas, where their targets are established plays such as the Permian Basin and the Eagle Ford Shale.
Shares of Torchlight, despite gaining a whopping 77% in 2019, are down 10.1% over 12 months, underperforming the S&P 500’s 1.9% loss over the same period as the oil and gas sector overall ranked among the worst performers in 2018. Per a Simply Wall St. report dated Jan 17, Torchlight, which has yet to turn a profit, had increased its debt from $7.2 million to $15 million over the past year, leaving the firm with $878,000 in cash and short-term investments. With debt reaching 76% of equity, Torchlight could be considered highly leveraged.
Considering its small market cap and high debt ratio, investors will keep a close eye on Torchlight’s balance sheet to judge whether the firm can survive another market downdraft. In the event of sharp downturn, liquidity could dry up, making it hard for companies running high debt and posting losses, to continue operating.
Sanchez Energy is a Houston, TX-based oil E&P company focused on the acquisition and development of unconventional oil and natural gas resources in the onshore U.S. Gulf Coast, with a current focus on the horizontal development of significant resource potential from the Eagle Ford Shale in South Texas the the TMS in Mississippi and Louisiana.
The company has faced significant turbulence in the recent period, with shares down over 67% in three months, and off nearly 88% in 12 months. While Sanchez’s production and sales picked up notably following its $2.3 billion acquisition of Anadarko Petroleum Corp.’s (APC) Eagle Ford acreage in Jan 2017, its top line has failed to keep up with its interest payment commitments and obligations to preferred shareholders, per Zack’s Equity Research. In the trailing three quarters, the firm has reported in the red and missed analysts’ expectations. Last month, the company received its second delisting warning from the NYSE, as the company’s market capitalization had been below $50 million for more than 30 consecutive trading days.
Sanchez is required to draft and submit a plan to the exchange that could lift its market cap above $50 million within 18 months. The company is reportedly exploring strategic options to strengthen its financials as it combats negative free cash flows and a high debt burden.
Weatherford International is one of the world’s largest multinational oilfield services companies, which provides innovative solutions, technology and services to the oil and gas industry.
While shares of Weatherford are up nearly 62% YTD, they remain down 25.4% in three months, and lower 68.5% over 12 months. In the most recent quarter, Weatherford posted positive free cash flows for the first time in years, with operating cash flow of $105 million. At the end of Q4, Weatherford had a net debt position of $7.39 billion.
Management suggested that it plans to use free cash flow and proceeds from asset sales to improve its balance sheet. Investors will continue to look out for signs of a turnaround at Weatherford after nearly a year of CEO Mark McCollum at the helm. “Based on the work we have completed on specific transformation initiatives, we continue to believe that we can achieve our $1 billion incremental EBITDA run rate goal by year-end 2019,” stated McCollum.
Capstone Turbine is a Los Angeles-based gas turbine manufacturer which specialized in microturbine power, and healing and cooling cogeneration systems.
Shares of Capstone are up nearly 54% YTD, making it the only stock on this list that isn’t down over 12 months, instead posting a 5.8% increase. In November 2017, the firm accomplished a 6-month fast-tracked project to consolidate its corporate headquarters and two separate manufacturing locations into a single facility. Capstone says it has now “realized considerable capacity and facility utilization improvements in its single-shift manufacturing operations.”
Moving ahead, the gas turbine maker will continue to focus on trimming costs, deploying this strategy to select members in its supply base. The company is slated to reported Q4 results on Feb 7, in which analysts on average expect a quarterly loss of $0.06 per share on revenue of $21.3 million, down 6.3% YOY.
At large, as long as the global economy continues to post solid growth, oil prices remain stable and the demand for energy stays strong, these stocks could continue their upward momentum.
That being said, it’s important to note that the higher reward potential for these penny stocks also comes with a higher risk profile. Because of the speculative nature of these low-cost oil and gas stocks, investors should continuously perform due diligence, given the magnitude of their drop could be severe in a sharp downturn.