Euro Pacific Capital recently initiated coverage on Lucas Energy (LEI) with a price target of $3 per share. This is interesting for a couple reasons: 1) Euro Pacific is a national firm with a broad footprint, while Lucas is a small oil company. And 2) $3 is 2.5x the current price of Lucas Energy stock, a significant premium for a equity research initiation price target.
1) Euro Pacific Capital is a relatively large, high profile advisory firm, with offices around the country and a prominent founder and CEO, who has his own radio show and is regularly featured in financial news media. Lucas Energy is a $36 million public oil company, with fields focused entirely in South and East Texas. It is unusual to see a prominent firm cover such a small public company.
2) when investment banks and advisory firms publish research, typically their price targets are within 50% of the current price, for a variety of reasons. The most obvious is that while markets are inefficient, it is rare for a company to trade at more than a 50% premium or discount to its intrinsic value. And research analysts often think that there is room as a stock price gradually goes up over time for the analyst to raise their price target. Despite this tendency, Euro Pacific put out a very high target price relative to the current price for Lucas Energy, at 250% the current price.
The simplest explanation is that Euro Pacific sees sufficient upside at Lucas that it is willing to put its name behind Lucas. Despite Lucas being small, even large investment firms are interested in stocks with the potential for a multiple times return. And Euro Pacific sees the potential for Lucas to more than double in the next 12-18 months.
One other factor worth considering is Euro Pacific's oil and gas analyst, Joel Musante, the analyst who did the work on Lucas Energy and made the buy recommendation with the $3 price target. Joel was recognized in 2011 by the Wall Street Journal as "the best on the street" in his sector, after his prescient calls to buy Brigham Exploration (bought out, no longer public) rather than EOG (EOG) or Whiting (WLL) in the Bakken. As the WSJ points out, he called for investors to buy Brigham at $1 per share, which was bought out for ~$36.50 per share two years later. In that time period, EOG was up ~50% and WLL was up ~200%, versus Brigham up ~3600%.
Mr. Musante has made other excellent calls on smaller E&P companies that have traded up hundreds of percent, including GeoResources, which incidentally was bought out less than a year after the WSJ article for Musante's target price. And he was early and positive on Synergy Resources (SYRG), which may gone over its skis recently but is up almost 300% in the past two years. And he went negative on GMX Resources (OTCPK:GMXRQ) when it was still trading for a split adjusted ~$125 per share, versus the current $0.25.
Mr. Musante has published his view on Lucas, that it could trade to $3 in the next 12-18 months. With this enviable track record and pedigree, I think this merits notice, and will likely generate traction with investors who have profited from Musante's previous recommendations in stocks like Synergy and by investing in companies like Brigham and GeoResources rather than bigger players like EOG and Whiting. And with a firm like Euro Pacific putting its name alongside Musante's in endorsing a $3 price target for Lucas, this tiny public oil company may have more promise than its current $1.20 share price and ~$36 million market cap might imply.
Additional disclosure: I am also short SYRG. Lucas is a small company, and investing in the stocks of small companies incurs additional risks. I was on the board of Lucas and left the board in March 2013 to pursue other endeavors. I have no ongoing business relationship with Lucas or any other company mentioned in this article.