One of the biggest stories on Wall Street over the past year or so has been the slump in oil prices and its widely felt affects across energy stocks.
Well, small-cap energy stocks have taken that hit worse than most, falling by much larger percentages on average than their brethren.
The basic idea is that while energy giants can withstand sustained lower energy prices thanks to their sheer scale and cash reserves, many of the smaller producers simply can’t. So you’re talking huge risks — closures, defaults, bankruptcies.
That said, you don’t want to completely ignore small-cap energy stocks. Many of these companies are actually thriving (or at least comfortably surviving) in the new price environment, while others have become targets for larger #&P firms looking to bolster reserves and production.
If you’re looking for a couple of ideas for new speculative bets, small-cap energy stocks offer a lot of upside from here. Here are six such stocks to buy:
Small-Cap Energy Stocks to Buy: Oasis Petroleum (OAS)
The big, bad Bakken shale remains as hot as ever, and small-cap energy firm Oasis Petroleum (OAS) remains one of the region’s best producers.
Over the last few years, OAS has managed to increase its reserves in the Bakken immensely via drilling and strategic acquisitions of other smaller wildcatters. More importantly, those reserves are predominately oil-rich. That’s a problem today, but it will be a boom to Oasis once oil properly rebounds.
Of course, it also could be a boon to another larger energy company.
Amid the rout in oil, Oasis’ market cap has dwindled from roughly $8 billion to $2.3 billion today. That much cheaper price has made OAS stock more digestible for a midsized to large oil producer.
And there’s a good chance that Oasis will get bought out. As a potential M&A target for years, OAS now finds 15% of its shares in the hands of activist hedge fund SPO Advisory. In its latest 13D filing, SPO has disclosed that it has discussed “strategic alternatives” for Oasis.
If a deal doesn’t go down, OAS still is a great energy stock that can be had for a mere 5 times earnings.
Small-Cap Energy Stocks to Buy: Bill Barrett Corporation (BBG)
The issue plaguing Bill Barrett Corporation (BBG) hasn’t been low oil prices, but low natural gas prices. A relatively mild winter (and so far, spring/summer) has sent stores of natural gas higher, clipping prices for natural gas down to under $3.
BBG’s latest earnings loss highlighted the issues.
Still, Bill Barrett Corporation still could be an interesting play among small-cap energy stocks.
See, roughly two-thirds of BBG’s assets are in Utah’s rich Uinta Basin, a relatively low-cost and steady region to produce in. This, as well as new capex programs in Colorado’s Denver-Julesberg Basin will help the firm see an estimated 10% growth in production this year.
Additionally, BBG has historically been a pretty conservative company. While the company does have some debt, it has been whittling it down, and the firm has some pretty aggressive hedging (more than 90% of production this year) in place for natural gas and oil.
Translation: BBG should survive the low-price environment, and its small market cap of around $500 million makes it a digestible buyout target as well.
Small-Cap Energy Stocks to Buy: Rex Energy (REXX)
Rex Energy (REXX) is an asset-rich small cap with premier holdings in the Marcellus, Utica and other Appalachian basin shales.
As any wildcatter will tell you, the Marcellus continues to be a hotbed of natural gas and natural gas liquids (NGLs) production. That’s the story Rex is seeing play out, and the E&P firm continues to pull more and more energy from the region.
The problem for REXX has been the decline in prices along with the relatively high cost of drilling in these areas. Unlike larger rivals, Rex Energy doesn’t have the scope to drill as cheaply. As a result, Rex has loaded up on debt to keep on pumping.
Investors were naturally spooked by a combination of lower energy prices and escalating debts, and they sent shares from a 2014 peak above $21 per share to as low as $2.50 by late January. However, recent capex cuts, debt renegotiations/reissues and few joint venture deals have REXX back up to the $5 level getting its roar back.
Maybe it’s finally time to get back to business.
Small-Cap Energy Stocks to Buy: PDC Energy (PDCE)
While PDC Energy (PDCE) isn’t even a huge name among other small-cap energy stocks despite being around for more than four decades, you probably won’t want to overlook PDCE.
PDC Energy primarily drills for oil and natural gas in the Wattenberg Field located in Colorado. The Wattenberg’s Niobrara Formation has long been a stable place for producers to crank out natural gas at relatively cheap costs. Part of what makes that so inexpensive is the region’s liquid-rich window.
PDC’s latest focus is on expanding that liquids production by adding acreage in Ohio’s Utica shale, which should help PDCE profit — when oil prices rebound.
Of course, PDCE isn’t just waiting around for that to happen. PDC Energy has been aggressively hedging its production and reducing capex costs in its primary production regions, which should help it navigate the remainder of this low-price environment.
PDCE also has Wall Street’s attention, as Goldman Sachs recently added the company to its coveted “Conviction Buy List.”
Small-Cap Energy Stocks to Buy: Bristow Group (BRS)
Oil services stocks certainly haven’t gone untouched — especially those that focus on more expensive drilling operations or products.
But battered Bristow Group (BRS) could be a diamond in the rough.
BRS operates the world’s largest fleet of helicopters designed to shuttle workers and other gear out to offshore drilling locations. And while that seems like a small niche … well, it is. But it’s also a coveted one. Helicopters are the fastest and most efficient way to send personnel out to rigs.
However, while Bristow’s shares have declined right alongside energy prices, results shouldn’t be as bad as investors fear. After all, people still need to be onboard platforms even long after drilling has stopped and they become production-operational.
While Bristow did miss analyst estimates for earnings last quarter (and the two before that), this still is a profitable company that even managed to improve its dividend recently, from 32 cents quarterly to 34 cents. BRS shares now yield a modest 2.3%.
All in all, BRS could be a quirky but profitable addition to your portfolio.
Small-Cap Energy Stocks to Buy: Carrizo Oil & Gas (CRZO)
The Eagle Ford, Niobrara, Marcellus and Utica shales are all among some of America’s best production regions — and all happen to be stomping grounds for Carrizo Oil & Gas (CRZO).
Carrizo has targeted some of the richest plays in the country and continues to see the fruits of its labor. Within its core acreage, CRZO has about 481 million barrels worth of oil and natural gas reserves — something that would be especially attractive to larger energy firms. Especially the 82,000 acres in the Eagle Ford.
As such, CRZO has been thrown around as a buyout candidate.
Well, with energy prices in the toilet, a buyout could be coming sooner than later. The combination of shale plays, strong reserves and rising production, as well as Carrizo’s sub-$3 billion market cap, should prove tantalizing.
CRZO’s 20% year-to-date gains hint that at least a few investors agree.
And if a buyout doesn’t happen, you’re still getting a top-notch producer with plenty of growth left in the tank.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.