Consistent withdrawals from global oil inventories owing to OPEC+ production cuts, increasing geopolitical risks, and supply disruptions are likely to push the oil prices higher in 2024, and the rally will continue through 2025. This presents a prosperous opportunity for investors seeking to invest in the energy market.
Against this backdrop, investors could consider investing in solid small-cap energy stocks such as Precision Drilling Corporation (PDS), VAALCO Energy, Inc. (EGY), and Obsidian Energy Ltd. (OBE) with major upside potential.
According to the IEA Oil Market Report, world oil demand is expected to grow by 920 kb/d in 2024 and by one mb/d in 2025, reaching 102.8 mb/d and 103.8 mb/d, respectively. Also, the global oil supply reflected growth by 290 kb/d in October to 102.9 mb/d. The growth was the result of the return of Libyan barrels to the market, which also offset lower Kazakh and Iranian supplies.
In October, the Brent crude oil spot price averaged $76 per barrel (b), $2/b above the average in September, which was an outcome of market concerns over Israeli response to Iran’s missile attack on Iran’s oil infrastructure, which could have hindered its ability to produce or market oil.
The ongoing withdrawals from global oil inventories stemming from OPEC+ production cuts and the potential for further geopolitical tensions are likely to push oil prices through the first quarter of 2025. Also, in its short-term energy outlook, EIA projected that the Brent price will surge from $72/b on November 11 to an average of $78/b during the first quarter of 2025.
Besides, the rising demand for natural gas and oil is projected to propel the growth of the offshore drilling market in the future. The offshore drilling market is poised to expand at a CAGR of 8.4%, reaching a market value of $46.27 billion in 2028.
Amid this, small-cap energy stocks present significant potential for investors. Investors can scoop up the shares of these stocks at a relatively lower price and benefit exponentially over the long term. Therefore, investing in fundamentally solid small-cap energy stocks like PDS, EGY, and OBE could be wise.
Let’s discuss the fundamentals of these stocks in detail:
Precision Drilling Corporation (PDS)
Headquartered in Calgary, Canada, PDS is a drilling company that provides onshore drilling, completion, and production services to exploration and production companies in the oil, natural gas, and geothermal industries in North America and the Middle East. It operates in Contract Drilling Services and Completion and Production Services segments.
In terms of forward non-GAAP P/E, PDS is trading at 9.46x, 23.4% lower than the industry average of 12.34x. Likewise, the stock’s forward EV/EBITDA multiple of 3.75 is 39.7% lower than the industry average of 6.22. Also, its forward Price/Cash Flow of 2.65x is 54.1% lower than the industry average of 5.76x.
For the third quarter that ended September 30, 2024, PDS’ revenue grew 6.8% from the year-ago value to $477.15 million. The company’s earnings before income taxes rose 91.6% year-over-year to $53.06 million. Its net earnings amounted to $39.18 million and $2.31 per share, up 98% and 59.3% from the prior year’s quarter, respectively.
Furthermore, the company’s adjusted EBITDA rose 24.3% year-over-year to $142.42 million.
Street expects PDS’ revenue and EPS for the fiscal year (ending December 2025) to increase 3.4% and 14.1% year-over-year to $1.44 billion and $7.51, respectively. Furthermore, the company surpassed the consensus revenue and EPS estimates in three of the trailing four quarters.
PDS’ stock has gained 2.3% over the past month and 5.8% over the past year to close the last trading session at $62.30. Its 12-month price target of $88.45 reflects a 42% potential upside.
PDS’ bright prospects are reflected in its POWR Ratings. The stock has an overall rating of B, translating to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock has a B grade for Quality and Value. PDS has topped among the 13 stocks in the Energy - Drilling industry.
Click here to access additional PDS ratings for Sentiment, Momentum, Growth, and Stability.
VAALCO Energy, Inc. (EGY)
EGY is an independent energy company engaged in acquiring, developing, and producing crude oil, natural gas, and natural gas liquids in Gabon, Egypt, Equatorial Guinea, and Canada. The company holds a 58.8% interest in Etame commercial production.
On November 11, EGY declared its quarterly cash dividend of $0.0625 per share of common stock for the fourth quarter of 2024, payable on December 20, 2024, to stockholders of record at the close of business on November 22, 2024. EGY pays an annual dividend of $0.25, which translates to a yield of 4.75% at the current share price. Its four-year average dividend yield is 2.35%.
On May 29, EGY announced the successful drilling campaign results. It drilled, completed, and brought into production four wells in Canada, which were 2.75-mile lateral development wells. The company anticipated strong initial production rates of over 500 barrels of oil per day (BOPD) in three of the four wells, with nearly 350 BOPD production for the fourth well.
For the third quarter that ended on September 30, 2024, EGY’s total net revenue increased 20.7% year-over-year to $140.33 million. Its operating income rose 24% from the year-ago value to $44.08 million. The company’s net income came in at $10.99 million and $0.10 per share, reflecting growths of 79% and 66.7% year-over-year, respectively.
In addition, the company’s adjusted EBITDAX of $92.76 million indicates an increase of 30% from the prior year’s quarter.
Street expects EGY’s revenue for the first quarter (ending March 2025) to increase 21.2% year-over-year to $121.34 million. The company’s EPS for the same quarter is expected to grow 42.9% year-over-year to $0.10. Moreover, it has topped the consensus EPS and revenue estimates in three of the trailing four quarters.
EGY’s stock has surged 25.8% over the past year to close the last trading session at $5.26. Wall Street analysts expect the stock to reach $9.13 in the near term, indicating a potential upside of 73.6%.
EGY’s sound fundamentals are reflected in its POWR Ratings. The stock has an A grade for Quality and a B grade for Value. Within the Energy – Oil & Gas industry, EGY is ranked #19 out of 76 stocks.
In addition to the POWR Ratings I’ve just highlighted, you can see EGY's Momentum, Growth, Sentiment, and Stability ratings here.
Obsidian Energy Ltd. (OBE)
Headquartered in Calgary, Canada, OBE engages in exploring, producing, and developing oil and natural gas properties in Western Canada.
On September 30, OBE revised its 2024 guidance, including the ongoing strong second-half 2024 drilling results, which continue to exceed the company’s initial expectations. The company raised its 2024 production guidance to the range of 37,000 to 37,400 boe/d (midpoint of 37,200 boe/d).
OBE’s total production rose 20.6% from the year-ago value to 39,714 boe/d during the third quarter that ended September 30, 2024. The company’s net income of CAD 33.20 million ($23.56 million) or CAD 0.42 per share indicates increases of 33.9% and 40% from the previous year’s quarter, respectively.
Furthermore, the company’s funds flow from operations increased 26.1% year-over-year to CAD 124.70 million ($88.49 million).
Analysts expect OBE’s revenue for the fiscal year (ending December 2025) to increase 8.8% year-over-year to $621.51 million, and its EPS is expected to grow 17.5% year-over-year to $4.59 for the same year.
The stock has declined 6.5% over the past month to close the last trading session at $5.49. Its 12-month price target of $10.40 reflects an 89.4% potential upside.
OBE’s promising outlook is reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
The stock has a B grade for Value and Growth. Within the Energy – Oil & Gas industry, OBE is ranked #9 out of 76 stocks.
Click here to access additional ratings of OBE for Momentum, Sentiment, Quality, and Stability.
What To Do Next?
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PDS shares were trading at $63.14 per share on Monday afternoon, up $0.84 (+1.35%). Year-to-date, PDS has gained 16.30%, versus a 24.87% rise in the benchmark S&P 500 index during the same period.
About the Author: Rjkumari Saxena
Rajkumari started her career as a writer but gradually shifted her focus to financial journalism, leveraging her educational background in Commerce. Fascinated by the interplay of business and economic shifts in equities, she aspires to evolve as an analyst. With a knack for simplifying complex financial concepts, her mission is to empower investors with insights that lead to profitable decisions.
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