Let’s face facts. When most investors gravitate towards the energy sector, they tend to focus on the big boys. You know, the Exxon Mobils (XOM) and Chevrons (CVX) of the world. After all, the major integrated behemoths are responsible for most of the world’s oil and natural gas production.
However, “most” doesn’t equal “all.”
There are plenty of other producers out there that are churning out steady and reliable energy production — with some of the best being desirably small. Truth is, small-cap E&P firms can mean just as much for your portfolio as their larger cousins.
In fact, adding a swath of them could very well lead to bigger returns over the long haul.
These junior and smaller exploration energy companies serve as some of main providers of new hydrocarbon supplies by finding new deposits and bring them into production. Major producers see these junior discoverer corporations as a way to add to their overall reserves, and often partner with or simply buy these mid-tier producers (sometimes at a high premium). And it only takes one gusher to turn a small company into a superstar and send its stock price rising.
Here are five of the best small-cap energy picks for your portfolio.
After falling more than 30% through mid-July, things are finally looking up for Forest Oil (FST). That’s because the small-cap energy producer recently began getting unsolicited bids for its Texas Pan-handle delineated oil, natural gas and natural gas liquids assets. The acreage in that region could be a significant opportunity for Forest.
According to analysts at Stifel Nicolaus, the sale of these assets could raise between $1 billion and $1.2 billion for the struggling producer. That provides plenty of firepower for Forest to pay down debt as well, as accelerate development of its rock-solid Eagle Ford acreage.
In the last year or so, FST has begun to move away from dry gas and more toward liquids production. The E&P firm has already added considerable acreage in the Permian Basin — 111,000 net acres in East Texas, which will enable Forest to access potential oil resources in several oil-bearing pay zones. The cash infusion will only strengthen that potential.
FST has all the makings of a doubler and represents a great turnaround play now that it has the real opportunity to focus on liquids assets.
Spun out of privately held Sanchez Oil and Gas back in 2011, Sanchez Energy (SN) could be one of the best pure plays on the Eagle Ford. The majority of the small-cap energy producer’s assets are 95,000 net acres in the prolific shale formation, and that acreage is really beginning to pay off.
Production at Sanchez’s wells grew an astonishing 320% over last year during the first quarter of this year. Overall, since being spun out in 2011, production has surged from less than 1,000 barrels per day to between 8,000 and 10,000 b/d by the end of 2013. More importantly, that production is 75% liquids and shale oil. This could help explain why Sanchez’s revenues have also leaped by triple digits during the same time frame.
With undeveloped land in the Woodbine of East Texas and the Montana portion of the Bakken, as well as 82,000 acres in the Haynesville, Sanchez is poised to continue growing quite rapidly.
SN shares currently trade at less than 10 times next year’s expected earnings.
Carrizo Oil & Gas
The Eagle Ford is the gift that keeps on giving for the E&P industry. Like the previous two small-caps on our list, things are no different for Carrizo Oil & Gas (CRZO). While the firm does have productive acreage in the Utica, Marcellus, Barnett and Niobrara shales, its main focus on growing production is currently in the prolific formation in Texas.
Based on rising production at its 68 Eagle Ford wells, Carrizo expects that its second quarter production will jump between 10,800 and 11,200 barrels per day, up from previous estimates of 9,600 to 10,000. That would boost total 2013 crude oil production by an estimated 40% and total production growth by 10%. However, even those estimates could prove low, given that Carrizo’s Eagle Ford production jumped by 57% during Q1.
That’s pretty good considering CRZO has been able to average about $105 a barrel for its energy because it’s focused on exporting it to Latin America’s growing diesel market.
With a forward P/E of just 10, CRZO shares could represent a great bargain based on its production growth.
With an eye towards Appalachian basin — i.e., the Marcellus shale — Rex Energy (REXX) continues to churn out steady and growing natural gas production. For the first quarter of this year, Rex’s production averaged 75.6 million net cubic feet per day of natural gas equivalent, exceeding the upper end of management’s guidance.
But the small-cap E&P firm isn’t resting on its laurels.
Rex has continued to acquire fields in the Marcellus as well as the Utica. The firm has allocated more than 30% of its $255 million capex spending for the year towards the Utica. Recent equity and asset sales should provide the company with sufficient liquidity to complete aggressive drilling plans through 2014 in the field.
Combining rising natural gas prices with newly completed infrastructure — courtesy of pipeline firm MarkWest Energy Partners, LP (MWE) — and Rex could be one of the best small-cap ways to play the Appalachian Basin and its natural gas riches.
With a trailing P/E of 232, investors are expecting big things from Approach Resources (AREX). And big things they just might get.
The small firm is focusing its operating area in West Texas and features a concentrated 148,000 net acres in the Permian Basin. That acreage has roughly 95.5 million barrels of oil equivalent. That’s some hefty profit considering the recent climb in West Texas Intermediate crude prices and the liquids-oriented nature of the Permian.
Overall, Approach represents a real startup firm in the energy space as the company has only three horizontal rigs currently drilling in the region. However, with the continuous acreage it owns in West Texas, along with sufficient capital to fund its $260 million capex budget, the potential for AREX shares is enormous.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.