While nominal price typically doesn’t mean much when it comes to actual value, stock prices generally don’t make it into sub-$5 territory without a good reason.
For energy firms, that reason has been a huge plunge in crude oil and natural gas prices. Abundant supplies have been met with dwindling demand, and that has caused crude oil to drop about 50% from its peaks.
This is a perceived death blow for many smaller energy stocks. Many small-cap energy firms that operate in more expensive-to-drill shale formations, and that have heavier debt loads, have sold off hard, pushing their share prices down. In many cases, they’re trading for Great Recession prices.
If you’ve got some money designated for riskier investments to burn … well …
These exploration companies serve as some of the main providers of new hydrocarbon supplies by finding new deposits and bringing 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.
Are they risky? Sure. But that’s how you reap outsized rewards.
So, in no particular order, here’s a look at seven energy stocks to buy for less than $5 a pop.
Energy Stocks to Buy for Under $5: Goodrich Petroleum Corporation (GDP)
Price as of 4/30: $3.87
As the low oil price took told, it hit Goodrich Petroleum Corporation (NYSE:GDP) especially hard. The firm’s stock price fell from a peak around $30 during the summer down to just $3.87 today. That huge drop could be attributed to GDP’s main area of operation — the Tuscaloosa Marine Shale.
The Tuscaloosa Marine Shale is one of the most underdeveloped shale fields in the country and mirrors the Eagle Ford in terms of geology. Early estimates of the field show that the reserve potential is huge — with more than 7 billion barrels. And GDP owns the most acreage by far in the field.
The problem is drilling in the Tuscaloosa Marine Shale is expensive — as in, it’s the most expensive field in the country. Costs per well range in the $13 million mark. You need higher oil prices to make the field even worth drilling. So despite great success with its initial test and prospecting wells, GDP has run into problems.
Still, the field is prolific, and Goodrich really is the only pure player left in town. If oil prices do come back, the Tuscaloosa Marine Shale (and GDP stock) will come roaring back too.
And any larger energy firm that wants in on the action could easily just swallow Goodrich with a lucrative buyout offer.
Energy Stocks to Buy for Under $5: Rex Energy Corporation (REXX)
Price as of 4/30: $5
It’s not just oil prices that have been falling. Natural gas and natural gas liquids (NGLs) have been taken to the woodshed as well.
And as a producer of these energy commodities, Rex Energy Corporation (NASDAQ:REXX) has dropped from a high of $20 per share down to … OK, right at the $5 mark, not under it.
Assets were never the problem at REXX; the firm has premier holdings in the Marcellus, Utica and other Appalachian basin shales. The problem was the hefty amount of money required to obtain and drill on those assets.
Debt ballooned at REXX, and while bankruptcy wasn’t a near-term issue, the recent fall in natural gas and oil prices didn’t calm investors.
However, a new deal helps remove much of that risk altogether. REXX has partnered with ArcLight Capital Partners LLC to form a joint venture to develop natural gas wells in Pennsylvania. The JV will help reduce REXX’s capex and bring in some much-needed cash. At the same time, the firm has managed to renegotiate the terms of its credit facility to be a tad more favorable toward the energy stock.
As such, REXX can focus solely only drilling and not have to worry about keeping the lights on.
Energy Stocks to Buy for Under $5: Swift Energy Company (SFY)
Price as of 4/30: $3.02
For investors looking for a potential lotto ticket among energy stocks, Swift Energy Company (NYSE:SFY) could be it at $3 per share.
Swift’s growth story has never been all that exhilarating. The firm’s core asset base — the Eagle Ford and Louisiana — are just OK. Not big enough to get excited about, but nothing so small that it’s not worth noticing.
The problem is that among those confines, SFY has a huge debt problem. The company’s last annual report showed a whopping $1.01 billion — about eight times its current market cap.
And still, SFY might be worth a salvage mission.
The firm has cut capex spending by more than 75%. That will help it save much-needed cash and potentially pay down some of that large debt burden. As for that debt, none of it is due until 2017 and 2022. That gives SFY plenty of time for oil prices to come back before it even needs to think about bankruptcy proceedings.
For investors, buying SFY stock is basically a lotto ticket on whether oil will recover enough by 2017 to make Swift shares rise.
Energy Stocks to Buy for Under $5: Pengrowth Energy Corp (USA) (PGH)
Price as of 4/30: $3.36
For investors looking cheap energy stocks that offer a little income, Pengrowth Energy Corp (USA) (NYSE:PGH) and its 7%-plus yield could be an interesting bet.
PGH is one of the former CANROYs — a now-defunct tax structure known for its high dividends. And since the end of the structure, PGH has suffered for numerous reasons … but the most recent one is, as you might have guessed, falling oil prices.
However, PGH has undergone some moves to make it throw the current malaise.
First was cutting its monthly dividend — it paid out 4 cents last year, and it now pays 2 cents, which still comes out to a 7.1% yield. That, as well as cutting capex, should help shore up the balance sheet. Additionally, a program of hedging its oil production at higher prices will continue to push the firm’s cash flows throughout the year.
Those moves will get us through 2015. Longer-term, PGH is focusing on thermal oil, a kind of bitumen. Its Lindbergh thermal project (after its initial cost) will be very cheap to maintain and produce significant cash flows for PGH, as the project should be economical viable with oil in the $40s. Those cash flows should be able to help fund the newly lower dividend.
Energy Stocks to Buy for Under $5: Warren Resources, Inc. (WRES)
Price as of 4/30: $1.08
Among energy stocks trading at Great Recession prices is small-cap Warren Resources, Inc. (NASDAQ:WRES). At just more than a buck per share, WRES is basically trading for what it was before the fracking boom — even though its asset base is still pretty strong.
The independent E&P firm’s two major projects include coal bed methane in the Rocky Mountains and secondary oil recovery within the Wilmington Basin in California. The Wilmington Basin is one of North America’s largest and oldest oil fields. WRES is able to buy older wells cheaply and use water flooding to help extract additional oil & natural gas from these wells. In fact, during its latest year-end earnings report and outlook, Warren mentioned that its assets in the Wilmington can be profitable even with oil as low as $45 per barrel.
Additionally, WRES holds some acreage in the “core-of-the-core” Marcellus shale.
And like most of the energy sector, WRES has undergone a massive capex cut to ensure that it has the cash on hand to make it through the current malaise. In the meantime, its wells in the Wilmington will continue to churn out steady (albeit small-time) production for the foreseeable future.
For investors, it be déjà vu all over again, as WRES stock could be a great way to play the eventual rise in crude oil prices.
Energy Stocks to Buy for Under $5: Petroquest Energy Inc (PQ)
Price as of 4/30: $2.68
Right now, the situation for most “little guys” is just making sure you can pay your bills on time until oil returns to normal levels.
Some have been successful on that front, and Petroquest Energy Inc (NYSE:PQ) is one.
PQ focuses on the Gulf Coast — both onshore and off in the shallow waters of the Gulf of Mexico. Shallow-water drilling is relatively cheap these days, as rigs are pretty easy to come by. The cash flows from these core offshore operations have been used to fund a drilling program in Cotton Valley and Woodford Shales. That strategy has been quite successful, as PetroQuest has increased its reserves nearly 600% since 2002.
As for keeping the lights on? PQ recently amended its borrowing facility and credit agreements to be a bit friendlier for the small-cap energy producer. Under the terms of the deal, PQ’s Thunder Bayou discovery well will be reflected as a “producing asset.” That allows it some wiggle room with regards to the various loan covenants under the credit facility.
For investors buying the energy stock, PQ is an interesting play on the entire Gulf Coast — and one that’s been quite good at growing its asset base.
Energy Stocks to Buy for Under $5: SandRidge Energy Inc. (SD)
Price as of 4/30: $1.89
SandRidge Energy Inc. (NYSE:SD) has always been basket case as far as investors are concerned.
The company was filled with some much promise and yet consistently underdelivered. Much of that could have been attributed to founder and former CEO Thom Ward. Ward ran SD like his own private cash cow and stuffed it with debt.
Even a dose of shareholder activism hasn’t helped shares; SD is down almost 75% since the oil crash, putting it at a market cap of just $900 million.
The only way out for SandRidge is a buyout, but there are plenty of reasons to believe one might happen. In fact, there are about 11,000 of ’em.
After selling much of exposure across the North America, SandRidge basically is a play on the fertile Mississippian Oil shale of northern Oklahoma and southern Kansas. SD owns about 1.85 million acres there that could hold more than 11,000 drilling locations. The problem is that it doesn’t really have the cash to tap that potential, nor does it make sense at current oil prices.
But a larger firm looking to stock up on cheap assets for an oil rebound … well, it might look at SD stock as an interesting buyout candidate. And at such a small valuation, SandRidge certainly is digestible.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.