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This list contains some of the smallest market cap players listed in the United States. Be careful, as some of these names are doing well and others are not. If oil prices drop below $100/barrel, these stocks will get kicked to the curb and valuations could drop significantly. Most of these are momentum plays, so make sure to have stops in place.

Blue Dolphin Energy Company (OTCQX:BDCO) is the smallest of this group; I have been watching this company bolt upward over the past few months. There are two segments to Blue Dolphin's business: Pipeline transportation and oil and gas exploration and production.

Blue Dolphin's pipeline company has 360 acres with 110 acres behind the hurricane levee in Freeport, Texas. It has a barge loading terminal with berth capacity of 40000/Bbl. The Blue Dolphin Pipeline has a system capacity of 180 MMcf of gas/day in which Blue Dolphin has an 83% working interest. The Buccaneer Pipeline has a system capacity of 43 MBbl of oil/day. Blue Dolphin has an 83% working interest here also. The Galveston Area 350 has a system capacity of 65 MMcf capacity per day. Omega adds an additional 110 MMcf capacity/day. Galveston Area 350 and Omega also are 83% owned by Blue Dolphin.

Blue Dolphin Petroleum has three areas of interest offshore the Gulf of Mexico. Galveston 321 has an overriding royalty interest of 0.5%. High Island 115 has a working interest of 2.5%. High Island 37 has a working interest of 2.9%.

The Blue Dolphin Exploration Company has a 7% interest in the Langsa Area, offshore Sumatra, Indonesia. This is the area with tremendous upside. In the 1980s, Mobil (NYSE:XOM) drilled four wells in this area. These wells produced 18833 barrels per day before being relinquished in 1986 when oil prices collapsed. A seismic of the Langsa Oil Pool in the 1990s by Matrix Oil gave a better picture of the area:

  • Recoverable Proven Reserves: 13 million barrels of oil
  • Proven and Probable Reserves: 33.5 million barrels of oil

In summary, this company has had an astounding run over the past year. It would have been impossible to predict Blue Dolphin trading at this level, with a 52-week low of $0.19. This company has no analyst coverage and is difficult to valuate.

  • P/E Ratio: Negative
  • Price to Sales: 1.63
  • Price to Tangible Book: 1.92

Cano Petroleum (NYSEMKT:CFW) made the news in the first quarter of last year, when George Soros purchased a million shares of the company. Although the chart tells a different story, it is easy to like Cano. This company uses EOR methods to obtain oil. Companies like Denbury (NYSE:DNR) have used this to recover oil with very low costs/barrel. Cano has five projects:

  • Cato Field-Proved reserves: 16 MMBoe
  • Davenport Unit-Proved reserves: 1.3 MMBoe
  • Desdemona Field-Proved reserves: 4.0 MMBoe
  • Nowata Field-Proved reserves: 1.5 MMBoe
  • Panhandle Field-Proved reserves: 28.9 MMBoe

Cano had announced a merger with Resaca Exploitation Inc. (RSOX) in 2009, which has been dissolved. The merger was thought to be mutually positive, as Resaca had short-term income and Cano had long-term possibilities. Cano has significant assets, if it can stay afloat until the resource is out of the ground. I would be careful here, as this company has some financial problems going forward.

  • P/E Ratio: Negative
  • Price to Sales: 1.53
  • Price to Tangible Book: 0.26

Mexco Energy Corp. (NYSEMKT:MXC) owns interest in 2432 gross oil and gas wells within the United States. Most of this interest is in the Permian Basin, which sports the lowest average cost per barrel ($25) onshore United States. Mexco keeps its costs down in a non-operator model. It minimizes downside by buying very small ownership in a large number of wells. As with many other small exploration and production companies, Mexco has had a nice run. The higher the price of oil, the higher the market cap of these companies. On March 2 I wrote an article on potential home run stocks, which included this name.

  • P/E Ratio: 105.58
  • Price to Sales: 4.74
  • Price to Tangible Book: 1.34

HKN Inc. (HKN) is an interesting company. HKN primarily explores and develops oil and natural gas properties in south Texas and Louisiana. It also explores for coal bed methane in Indiana and Ohio. It sold its remaining interest in Spitfire Energy Ltd., which operates in Canada. Most notably, in 2010 HKN received a 34% increase in oil prices and 26% increase in gas prices versus 2009. Operating profits for 2010 were 110% higher for the oil and gas segment. Operating expenses for the same time frame decreased 9%. HKN purchased an increased ownership in Britewater International LLC to 52.09% Britewater owns a process of purifying oilfield emulsions.

On March 14, a seven-year contract was signed to use Britewater's technology. This is an interesting play, not only because of the investment in Britewater, but also because it is currently profitable.

  • P/E Ratio: 49.2
  • Price to Sales: 3.03
  • Price to Tangible Book: 0.59

Earthstone Energy Inc. (NYSEMKT:ESTE) is an oil and natural gas exploration and production company with emphasis on the Montana and North Dakota locations of the Williston Basin. It also has locations in Wyoming, Colorado, Texas and Louisiana. As of March of 2010, Earthstone had interest in 101 oil wells and 39 gas-producing wells. It seems Earthstone buys what it believes to be under-managed wells. It then works the well to increase the barrels of oil produced per day. Earthstone's upside is the mineral rights it garners from the transaction. Earthstone also purchases interest in wells being drilled, like the current situation with Brigham (BEXP) in Banks Field of McKenzie County, North Dakota. Recent news has been bullish Earthstone. Be careful with this company, as it trades on very low volume.

  • P/E Ratio: 33.2
  • Price to Sales: 2.18
  • Price to Tangible Book: 1.22

Royale Energy Inc. (NASDAQ:ROYL) is an oil and natural gas exploration and production company with interests in California, Utah, Texas and Louisiana. On March 9, Royale announced earnings of $1.3 million in 2010 versus a loss of $2.2 million in 2009. The earnings spike was due to increased revenues of 34.5%. In 2010, Royale drilled nine wells, of which five were productive. It has 9032.93 net developed acres in California. Royale has an additional net developed acres of 1794.83 outside California. Net volumes were 6511 BBL oil and 603330 MCF of natural gas. 2010 was an outstanding year, but investors should tread lightly as Royale's volumes are predominantly natural gas, and this is the first year of profit in the past five years.

  • P/E Ratio: 43.3
  • Price to Sales: 1.98
  • Price to Tangible Book: 2.13

BMB Munai Inc. (NYSEMKT:KAZ) is engaged in exploration and production of oil and natural gas in the Republic of Kazakhstan. BMB's current exploration territory covers 850 square kilometers. Its has 1230 net acres proved developed acres. The total contract area is approximately 210000 acres. Its proved undeveloped reserves are 2.6 million BOE. Although this company could have significant upside, the majority of reserves will not be obtained in the contracted time, plus 98% of company revenues come from one customer (Titan).

  • P/E Ratio: 5.4
  • Price to Sales: 0.84
  • Price to Tangible Book: 0.24

Lucas Energy Inc. (NYSEMKT:LEI) recently announced a partnership with Marathon (NYSE:MRO) to drill its Eagle Ford acres. It's always bullish when one of the big oil names jumps into a project. Marathon will have rights to approximately 1000 acres or 50% of Lucas' leasehold rights in Wilson County. Lucas will still maintain the leasehold above the Eagle Ford geologic formation. On March 8, I covered Lucas as one of my favorite speculative names here. Lucas has 14200 net acres in the Eagle Ford. Lucas purchased this acreage for $300-400 per acre. The value is now approximately $10,000/acre. In 2010, Lucas sold 27% more oil and at an increase of 14% in oil price compared to 2009. Lucas is well placed going forward and may be the best name on this list.

  • P/E Ratio: Negative
  • Price to Sales: 4.71
  • Price to Tangible Book: 0.56

I am unsure where oil will go from here, but if I had to guess it will trade sideways from $100-110 for the short to intermediate term. If this is the case, many of these names have value.

Sources: 2010 Annual Reports; Zecco (fundamentals).

Source: 8 Small Oil and Natural Gas Stocks With Continued Upside: Part I