When oil prices tumbled over the last two years, they took out plenty of energy stocks. But while the larger energy producers have emerged relatively unscathed from the oil price rout, the small-cap stocks in the energy sector haven’t been so lucky.
Without the large cash balances, cheap access to credit and mega-operating cash flows, many small-cap energy stocks have been forced to stop drilling, accept meager buy-out offers or, worse, file for bankruptcy.
That’s not exactly a great operating environment. Under that scenario, it’s easy to see why investors have shunned small-cap stocks in the energy sector over the last two years.
But times are a changin’.
With oil prices finally rebounded to right around $50 per barrel, small-cap energy stocks are on the move once again. They simply have the most to gain from rising oil prices, as their profits are directly tied to that price. In many cases, you have energy stocks close to the brink of insolvency now making actual profits once again.
With that in mind, here are three small-cap energy stocks that have explosive potential.
Small-Cap Energy Stocks With Potential: Carrizo Oil and Gas (CRZO)
While some small-cap energy stocks wet bust and were filing for bankruptcy, Carrizo Oil & Gas Inc (NASDAQ:CRZO) has been busy kicking butt and taking names. The independent E&P firm is one of the strongest frackers out there.
That strength comes from CRZO’s main stomping grounds. The Eagle Ford, Niobrara, Marcellus and Utica shales are all America’s best producing regions and the small-cap E&P firm drills in them all.
They are also some of the lowest-break-even and highest-margin regions to drill in. Carrizo estimates that its break-even, or inflection point, price in the Eagle Ford is around $35 per barrel. So with oil approaching $50, CRZO should be raking in the dough.
Meanwhile, CRZO has a very low debt profile with plenty of room left on its revolver and no long-term debt coming due anytime soon. That gives the firm plenty of time to capitalize on higher oil prices and other opportunities.
And speaking of those opportunities, it may be CRZO itself. Given its operating profile, Carrizo has constantly been brought-up as buy-out target for a larger firm.
Despite being up over 42% year-to-date, Carrizo’s best days could be ahead as oil continues to rise. In the end, investors are getting one of the best small-cap energy stocks with CRZO. They shouldn’t wait to snag this one.
Small-Cap Energy Stocks With Potential: Viper Energy Partners LP (VNOM)
Explosive small-cap energy stocks can be found when one stock has a great relationship with their parent. And that’s the case with Viper Energy Partners LP (NASDAQ:VNOM).
VNOM owns nothing but royalty and mineral interests in various oil and natural gas properties owned by Diamondback Energy Inc (NASDAQ:FANG). In just a short time, FANG has become one of the best and lowest-cost players in the Permian Basin. And part of that comes from its relationship with VNOM.
VNOM serves as a cheap funding vehicle for FANG. The royalty firm will raise money through equity raises and then purchase various rights from Diamondback. Diamondback gets a cash to help power its various drilling programs, while Viper shareholders get some big-time dividends. The combo of stocks has allowed the “snake” to not only survive, but thrive in the oil price downturn.
What’s really great for VNOM shareholders is that the firm’s dividends are variable … meaning as oil prices go up, so will the payouts. Pretty much instantly. And considering that FANG’s production continues to grow and VNOM keeps supporting it, the payouts could surge exponentially over the next few years.
That makes VNOM — thanks in part to its growing dividend — one of the most explosive small-cap energy stocks to buy.
Small-Cap Energy Stocks With Potential: Clayton Williams Energy (CWEI)
The oil price rout was especially hard on Clayton Williams Energy, Inc. (NYSE:CWEI).
Like a lot of small-cap energy stocks, CWEI used a hefty amount of debt and revolving credit in order to fund its drilling program. That wasn’t so bad when oil was north of $100 per barrel. It was easy to make the interest payments. However, with prices crashing, Clayton Williams found itself in a world of hurt.
What followed was a huge cost cutting plan — in which the firm dropped its drilling CAPEX spending to basically zero. The firm also needed to do a big-time equity raise and tap private equity firm Ares Management L.P. (NASDAQ:ARES) for a $350 million loan. All of these moves were designed to bolster and reinforce its balance sheet, until oil began moving up again.
Well, it looks like the moves may have just worked.
CWEI is much stronger coming out the rout and higher oil prices will mean that much more after its strategic moves to better itself. And investors seem to like what they see. Clayton William’s is up a staggering 193% year to date. However, much more could be in store for the small-cap energy stock, as CWEI is quickly nearing its inflection point in the Permian Basin.
In the end, CWEI could be one of the best small-cap energy stocks to buy on oil’s rise.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.