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  • Vaalco Energy blew away earnings last month, giving investors another option in the small-cap energy stock space.
  • Progress on the exploration front looks to be progressing nicely, which will add to potential profit down the line.
  • Great financial metrics make EGY a compelling argument to go long right now.

It seems lately energy stocks are getting more and more attention. Natural gas prices are rising, and the recent political turbulence in Russia is keeping crude oil prices elevated near $100 per barrel. And of all the penny stocks out there you can buy, we've found one in the energy sector that we need to keep an eye on…

Vaalco Energy (NYSE:EGY)

Vaalco Energy is an independent energy company exploring, developing, and producing crude oil and natural gas. The company owns producing properties and conducts exploration activities in Gabon and Angola.

EGY is also exploring as a non-operator in the British North Sea and Equatorial Guinea, West Africa. Vaalco also acts as the operator of various resource properties in Montana, South Dakota, and North Texas.

And a couple of weeks back their stock jumped from $5.98 to $7.25... and it now trades over $8 a share!

So why the big move?

EGY announced earnings that blew away both estimates and last year's earnings. Analysts were looking for net income of $0.34 per share, and the company delivered $0.46 per share for the three months ending December 2013. During fiscal 2013, Vaalco delivered a total of $0.74 per share of net income.

That's in comparison to the $0.01 of net income in 2012.

And Steve Guidry, Vaalco Energy CEO, advised progress on wells is being made in both Equatorial Guinea and Angola… where the company hopes to have 4 exploration wells drilled by the end of 2015. That means investors can get in now, as energy prices continue to rise and EGY builds production output… which could drive the stock price much higher.

As for the remaining company metrics, EGY has plenty of reasons investors should be taking a closer look at picking up shares of the stock. Here are a few highlights-

  • Virtually no debt to speak of- which is outstanding for an independent oil and gas firm
  • A forward P/E of just 9.4xmaking this stock cheap relative to its peers. The independent O&G industry has a 29.5x P/E.
  • Fiscal 2014 EPS projections of $1.14 per share
  • Institutional ownership of 82% of the stock- which is a huge percentage!
  • Just 6% of the shares are held short- meaning this stock isn't on a short seller's "A list"

While every investment has upside potential, there are still plenty of risks surrounding EGY.

Some of these risks include:

  • The company has trouble developing properties.
  • Actual production could be less than estimated reserves.
  • EGY could run into trouble with foreign governments, or potential domestic political instability could arise.

But even after weighing the risks, EGY still appears to be an excellent buy. Here's why...

Given the success Vaalco has seen in the past developing properties, my confidence remains high that management will continue to execute their growth plan. They're reporting consistent progress on current projects, which shows development progress and defined time tables.

And even though actual production might not meet estimated reserves, new production will certainly add to top line growth. In the end it's just a matter of how much or how little investors see revenue increase.

Finally, Equatorial Guinea has become one of the safest countries for investors in West Central Africa. They've shed the perception of other countries in the region and have been working steadily as a global natural gas and oil supplier for more than 5 years.

What's more, Angola has become a more politically stable country with both military and government leadership leading the way for the past three years.

If you're comfortable with the risks EGY presents, then this stock might be worth adding to your portfolio. Should profitability and future development stay the course, EGY could turn out to be a great low-cost energy investment.

Source: Vaalco Energy - Small Caps On The Rise