Jan 23, 2020 (Baystreet.ca via COMTEX) -- Since the turn of the year, energy stocks have become a put owner's dream--what with the energy sector virtually generating the worst returns of all US sectors.
And the harder you look, the worse it gets, making it nearly impossible to find value in this gridlocked mess.
One of the industry's popular benchmarks, the SPDR S&P Oil & Gas Exploration ETF (XOP) has tanked 30% over the past year, , badly underperforming the broader market all thanks to a perfect storm of supply and demand shocks coupled with slowing economies.
This comes to nobody's surprise, considering that small-cap oil and gas stocks have higher leverage than large-caps. XOP invests in a lot of highly leveraged small-and mid-cap oil and gas companies in the exploration sector that tend to decline significantly on concerns about liquidity and debt repayments, but also bounce back quickly due to supply shocks like the Saudi Aramco drone attacks or, better still, a significant discovery.
Nothing quite tickles the fancy of energy investors like a giant oil or gas find.
But here's the secret sauce: stocks of small-cap companies tend to enjoy serious leverage whenever they strike oil, whereas the heavyweights, well, not so much.
You don't have to look very far for an example: shares of ExxonMobil Corp. /zigman2/quotes/204455864/composite XOM -0.80% are down more than 20% since the company announced a 14-strong string of good discoveries off the coast of Guyana in 2015, one of its best finds ever.
That's because companies like Exxon have their fingers in too many pies, and their share prices depend on many variables. Junior explorers, however, tend to have a singular focus. You can buy them up for pennies, and when and if they strike oil, it's a shareholder bonanza of big returns.
Granted, state-owned behemoths and giant energy companies tend to have more than their fair share of discoveries. But that does not in any way mean smaller companies have been missing out on the action--on the contrary, they have time and again showed up the big boys and earned their bragging rights in the arena, too.
Here are some of the biggest discoveries made or potential for discoveries that might be made by smaller oil and gas exploration companies:
#1 Biggest Oil Discovery in the Australian North West Shelf
For more than 15 years, oil exploration companies had been coming up empty in the once-fecund Australian North West Shelf. Nearly everybody had given up searching for liquids in the offshore block.
That is, until block partners Quadrant Energy and Carnarvon Petroleum hit paydirt in 2018 after making what is billed as "Australia's most exciting oil find in decades".
Quadrant and Carnarvon have emerged as some of the top wildcatters to watch in the region after uncovering a find containing some 171 million barrels of oil. You would have to go back to 1996 to find an oil discovery in the region above 100 million barrels.
Shares of Carnarvon ($555 million market cap) have jumped more than 150% since the discovery was announced, while Quadrant was acquired by Australian natural gas giant Santos Ltd (STOSF) in 2018.
Actually, these guys got lucky. The companies were prospecting for 545 bcf of gas but ended up with something far more valuable. After all, oil has a significantly lower risk profile than gas and does not require expensive infrastructure or gas contracts.
In other words, oil is both easier and faster to monetize than gas.
So, what are the expected pickings here?
Before the latest appraisal was carried out, Quadrant executive Fred Wehr had gushed:
''...the low case is solidly commercial, the mid-case is awesome and the upside is staggering."
After the appraisal, Santos chief executive Kevin Gallagher revealed that the find was actually "bigger than expected".
So, we can surmise that Quadrant thinks the find is awesome-to-staggering since it's well above the base case estimate of 150 million barrels of oil.
#2 Namibia's Eagle Ford
Reconnaissance Energy Africa /zigman2/quotes/204476071/delayed CA:RECO -6.02% (otcmkts:LGDOF) is the smallest of the three small-cap discoveries, with a market cap of only $39 million, with shares selling for under $0.80. Yet, it's sitting on a shale basin that's 25,000 square kilometers, similar in size to the Eagle Ford basin. Yes, that's right: This tiny explorer just acquired a 90% exploration permit interest to the entire, 6.3-million-acre Kavango Basin in Namibia--Africa's area which includes shale geology.