3 Small-Cap Oil Companies with Huge Growth Potential
Hussain is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Companies involved in the oil and gas drilling industry are involved in developing oil and gas fields. Their primary activities are exploration and production of crude oil and gas. The US oil exploration and production sector is going through an amazing phase; shale oil and gas has brought about a revolution in the sector. According to an International Energy Agency report, the US is on track to becoming the world's largest oil producer by the end of 2020. Crude oil production increased by 1 million barrels a day in 2012. This growth is driven by technological advances in the industry. That’s why I am considering three small-cap oil companies, Approach Resources, Inc. (NASDAQ: AREX), Rex Energy Corporation (NASDAQ: REXX), and Carrizo Oil &Gas (NASDAQ: CRZO), for my analysis.
Approach Resources is an independent energy company engaged in the development, production, exploration, and acquisition of oil and gas properties. During the first quarter of 2013 the company produced 754 million BOE, and drilled ten wells, out of which five were completed. Approach Resources has proved reserves of 95.5 million BOE, consisting of 69% oil and NGL, and 31% gas. Approximately 99.9% of the company's proved reserves are located in the Permian Basin in West Texas. According to an estimate, the Permian Basin is one of the largest oil fields in the world. A recent presentation from Pioneer Natural Resources shows the total recoverable resources in the Permian Basin are in the range of 50 billion barrels of oil equivalent, making it the second-largest oil reserves in the world, and largest in the US. Approach Resources was one of the first companies to drill in the Permian Basin, which has recently become the most important region in the industry due to its high oil contents. Approach Resources has 148,000 net acres in the Permian Basin. The company's core concentrated position in the Permian Basin gives it a competitive edge and huge growth opportunities. The company is considering issuing $250 million debt, which would be used to repay outstanding indebtedness, and to fund capital expenditure and working capital needs of the company; this would further strengthen company’s operation. Due to all the above reasons, I can see a very bright future for Approach Resources.
Rex Energy is an independent oil and gas company operating in two main areas in United States: the Appalachian Basin and the Illinois Basin. In the Appalachian Basin, the company is focused on the Marcellus Shale and Utica Shale drilling and exploring activities; in the Illinois Basin, the company’s focus is on oil well production. In the latest reported quarterly results for the company, revenue growth has surpassed expectations, whereas the earnings per share reported was in line with expectations, representing good results for the company. Historically one-third of oil wells drilled in the United States have been drilled in the Appalachian Basin, with the reason behind the high rate of drilling there being the high success rate of 97% for gas well drilling. Recently Rex Energy's focus has shifted toward the Appalachian Basin and it has allocated 90% of its capital expenditure budget towards the Appalachian Basin. With the change in operating focus of Rex Energy, its future prospects have also improved, and this change in focus will lead the company towards success.
Carrizo Oil & Gas
Carrizo Oil and Gas is a small-cap oil and gas exploration, development, and production company with productive acreage in Eagle Ford Shale in South Texas, Marcellus Shale in Pennsylvania, and Utica Shale in Ohio. Recently the company has increased its production of oil, and second-quarter oil production expectations have been increased to 10,800-11,200 barrels per day. In the current year, the company has aimed to increase the production of oil to 40% from 28%; this all can be attributed to the strong Eagle Ford Shale results. A major unconventional oil discovery in the Eagle Ford Shale region has caused oil and gas companies running and buying rights for the minerals in this region in order to reap this bonanza. This unconventional oil discovery in Eagle Ford Shale would help Carrizo a lot, because most of Carrizo's operations are located in the Eagle Ford Shale region. Sixty-eight out of its 95 wells are located in the Eagle Ford Shale region, which will provide Carrizo a competitive edge over the other small-cap firms.
The bottom line for my analysis is that as the economy revives, demand for oil and gas will rise, and so as the price of oil increases, this will be good for oil drilling and exploration companies. The three small-cap stocks that I have considered all have huge growth potential because all these companies are changing their focuses with the changes in trends, and all of these companies are positioned well in their respective active regions.
Hussain Asghar has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!