When it comes to the energy sector, many stocks that trade under $5/share are considered to be very speculative. As a result, I wanted to focus on companies that could benefit from developments within their specific markets. In this article I've chosen two highly-speculative companies that have met the follow criteria:
- Each company must trade below $1/share
- Each company must have a Market Cap under $100 million
- Each company must have announced significant developments in the last 24 hours
Pacific Ethanol, Inc. (PEIX) which is based in Sacramento, California currently "produces and markets low carbon renewable fuels in the United States. It sells ethanol to gasoline refining and distribution companies; provides ethanol transportation, storage, and delivery services in the Western United States, primarily in California, Arizona, Nevada, Utah, Oregon, Colorado, Idaho, and Washington". (Yahoo! Finance)
From a fundamental perspective, shares of PEIX currently carry a market cap of $49 million, have traded down 2.83% since July 1st and are currently trading in-line with their 50 DMA and at a 12.82% discount to their 200 DMA.
PEIX data by YCharts
On Wednesday December 19th it was announced that the company plans on increasing its ownership interest in its several of its plants and improve on several individual debt positions. PEIX also extended the maturity of its revolving credit line to 2015, agreed to purchase $21.5M in plant debt to be extended to 2016, and will purchase an additional 13% interest in the plants to increase its ownership interest to 80%. These moves should all bode well for the company's bottom line and as a result I think shares are undervalued at their current price point of $0.34/share.
Gastar Exploration, Ltd. (GST) which is based in Houston, Texas operates as "an independent energy company, engages in the exploration, development, and production of natural gas and oil in the United States. It focuses on the unconventional reserves, such as shale resource plays". (Yahoo! Finance)
Fundamentally speaking, shares of GST currently carry a market cap of $58.50 million, have traded down 55.13% since July 1st and are currently trading at a 3.37% premium to their 50 DMA and at a 39.08% discount to their 200 DMA.
GST data by YCharts
On Wednesday December 19th the company said it was on track to achieve its guidance target of having 38 horizontally operated Marcellus wells on-line and production ready by year-end. The company also increased its guidance related to its estimated average daily total net production in Q4 to 42-43 MMcfe/day from previous 38-40 MMcfe/day. If Gastar can meet or exceed both its total net production per day, as well as the number of wells that are operational I see no reason why potential investors shouldn't acquire a position at current levels.
Are there any negative catalysts potential investors should consider before establishing a position in either company? As is the case with any energy company, potential investors need to keep in mind some of the negative catalysts that go hand-in-hand with both Pacific Ethanol and Gastar Exploration. On one hand, any negative indication in terms of production could result in the sell-off of either stock. On the other hand, weaker than expected earnings at any point over the course of the next 12-18 months could also send shares down a very unfavorable path.
For potential investors looking to establish a position in either Pacific Ethanol or Gastar Exploration, I'd take a closer look at each company and keep in mind the primary positive and negative catalysts moving forward. Given the fact that both companies are making considerable strides in terms of capacity and production, I'd look to establish a small to medium position at current levels and add to that position once future developments are announced.