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5 Hot Small-Caps to Buy on a Dip this Summer

Get ready to swing for the fences -- but wait for your pitch

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exco185Exco Resources

Exco Resources (XCO) is one of many oil and gas small-caps that seem attractive to me amid a soft patch for the energy sector. While shares haven’t been impressive for the past few years, recent strength and the hopes of a bright 2014 make these energy sector plays attractive as longer-term investments.

Exco is an onshore oil and natural gas play focused mainly on shale operations. That means its fossil fuels are a little more costly to extract, and that profitability depends on a high price point for natural gas and crude.

Obviously, with weak commodity prices and only modest inflation in the past few years, XCO stock hasn’t been all that grand. The company reported a steep loss in fiscal 2012 as a result. But don’t let the loss scare you, because some of the shortfalls have been self-imposed and are ultimately good for the long run. Consider that in fiscal 2012 EXCO reduced drilling rigs from 24 to just 5, slashing capital expenses by 48% — laying off more than 60% of its contractors and roughly one in six full-time employees. The restructuring hit the company hard but has put it on track again now that it has “right-sized.”

Furthermore, long-term debt has actually declined from $1.9 billion a year ago to $1.3 billion in the company’s latest earnings report, thanks to private limited partnership with Phil Falcone’s iconic Harbinger Group.

So don’t fret that this company is going under, what with lower debt and a big hedge fund buy-in.

The timing may be perfect to stake out a claim in Exco stock this summer on a pullback now that it has given up 8% in about a week on little news (other than simply the payment of its dividend). Even after the pullback, shares are up more than 12% year-to-date.

With higher margins thanks to reduced cost and agile operations that are prepped to ramp up whenever the recovery begins in earnest, this is a great cyclical energy play. There is risk, of course, should energy prices remain soft. But Exco hedges actively against declines — don’t feel like a significant move down in nat gas will ruin this pick.

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