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While it makes sense to stick with large cap oil stocks for major sums of money, it can be a lot more fun and financially rewarding if you add some small cap oil stocks to the mix. Stocks like Chevron (NYSE:CVX) and Exxon (NYSE:XOM) should offer investors relative stability and also generate reasonable income through dividends, plus add some growth potential. However, these companies are giants in the industry and even a major new oil find won't necessarily move the share price by much, if at all.

Chevron and Exxon are very well-known and the market is therefore less likely to allow any "inefficiencies" in terms of the stock value. That means it's much harder for investors to get an edge when investing in large cap names. It's also worth noting that both Exxon and Chevron are trading very close to 52-week highs and that could limit gains for investors buying at these levels.

These major energy stocks are no longer trading at bargain valuations, and could even be considered to be overbought at this time. That is why it might make sense to take some profits on stocks like Chevron and Exxon and consider investments that still offer bargain values, and which are trading well below the 52-week highs.

That brings us to small cap oil stocks which are a higher-risk investment, but also offer the potential for "homerun" returns. One reason that huge returns are possible with smaller stocks is because market inefficiencies are far more common with lesser-known companies that have less liquid stocks. This creates more volatility and that is where investors can find an edge. Another factor that can take stocks well below "fair value" is excessive optimism by shorts. Sometimes shorts can over-play their hand and set themselves up for a significant short squeeze. One stock to consider that appears to be trading at bargain levels now is discussed below:

Abraxas Petroleum Corp., (NASDAQ:AXAS) is focused on oil and gas exploration and production in the Rocky Mountain, Mid-Continent, Permian Basin and Texas Gulf Coast Basin. These areas include projects in the high potential Bakken Range and Eagle Ford Shale areas. The company believes that these projects have substantial upside by using it's expertise in horizontal drilling and 3-D technology.

The Bakken Range has been estimated to have about 24 billion recoverable barrels of oil, which is why companies (like Abraxas Petroleum) that have Bakken exposure could be poised for considerable long-term gains. Here are 6 reasons why this stock could be poised for a rise back over $3 (which is where the shares were trading in July), potentially fueled (in part), by shorts.

1. According to Shortsqueeze.com, there are over 10.1 million shares short in this stock. Since it trades about 789,000 shares on an average volume day, it could take nearly 13 days worth of volume for shorts to cover. When this stock was trading for over $4 per share (in the past year), and when oil had dropped to the $80 per barrel range and looked like it was ready to go lower, the short case made a lot more sense. However, at just over $2 per share, and with oil prices surging over 20% in recent weeks (back to about $100 per barrel), the shorts appear poised to give back much of the recent gains made, possibly soon.

2. Abraxas Petroleum has a strong level of management ownership. For example, Franklin Burke, (a director), owns nearly 3.1 million shares. Robert Watson (the CEO and President) owns over 1.2 million shares, and other insiders also own meaningful positions in this stock. Abraxas shares have also been bought by some major institutions and fund managers. For example, Northpointe Capital LLC, (which is a money management firm focused on serving the investment needs of institutions and high-net-worth individuals), owns over 7.6 million shares which represents a stake of over 8% in this company.

Well-known fund manager The Vanguard Group, Inc. owns nearly 5 million shares, which is equivalent to about 5% of the entire company, and two other funds have similar stakes. (Neuberger Berman Group, LLC., and Frontier Capital Management Company, Inc.) Insider ownership can be a key factor since it generally means insiders are aligned with shareholder interests. Institutional and fund ownership is also important, as fund managers tend to do heavy amounts of due diligence before buying stakes in a company that are equivalent to 5 to 8% of the entire company.

3. Abraxas Petroleum recently reported solid financial results with a profit of $11 million for the second quarter of 2012. Revenues came in at $15.9 million and production totaled 388.7 MBoe (4,272 Boepd), a 12% increase over Q1 2012. Oil prices are considerably higher now when compared to the lows of the second quarter. That could mean that consensus earnings estimates (shown below) are too low and poised to rise.

4. The share price is just too low: Like many oil stocks, Abraxas shares drifted lower from well over $3 in July to current levels at about $2.25 per share. Many oil stocks have made strong gains in the past couple of weeks, fueled by rapidly rising oil prices to around $100 per barrel, and Federal Reserve policies of additional stimulus which could lead to inflation and a weaker dollar. Abraxas shares have started to bounce off recent lows, and that could be a signal that the stock is ready for an even more powerful move in the near future. Furthermore, the average of analyst price targets for Abraxas shares is $5.43 per share.

5. Consider the big potential that small, neglected oil stocks offer: To more clearly see examples of how small cap oil stocks can offer huge rewards due to volatility and market inefficiencies, let's take a look at a couple stocks: Northern Oil and Gas, Inc. (NYSEMKT:NOG) shares plunged to about $2 around the height of the financial crisis in early 2009, but within a couple of years the stock traded over $30 per share. Kodiak Oil & Gas (NYSE:KOG) also were sold off to low levels around that same time period, and were trading for about a buck in early 2009, and recently went over $10 per share.

By contrast, the more liquid, better known large cap oil stocks like Exxon only went down to about $65 at the 2009 lows and Chevron traded at about $60. Buying the large-cap oil stocks when investors were dumping shares, led to nice profits over the past couple of years, but the returns were not life-changing by any means. Buying small cap oil stocks when investors view them to be unfavorable, can result in life-changing gains.

Northern Oil shares jumped about 15 times higher from trough to peak, and Kodiak could have been right around a ten-bagger for some investors. An investor is unlikely to ever make ten to fifteen times their money in their lifetime when investing in a large cap stock like Exxon, but those types of returns are still possible in select small cap oil stocks.

6. Consider the power of "left for dead" stocks. Another small oil stock Warren Resources (NASDAQ:WRES) which was trading around $2, when I last wrote about it in August, now trades for $3.34 per share, which is a gain of over 50%. Kodiak Oil & Gas shares have also seen a huge gain off the 52-week low of $2.43 per share, to a current $9.62 per share.

Key Data Points For Abraxas Petroleum From Yahoo Finance:
Current Share Price: $2.27
52-Week Range: $1.86 to $4.45
Dividend: none
2012 Earnings Estimate: 3 cents per share
2013 Earnings Estimate: 18 cents per share

Key Data Points For Exxon From Yahoo Finance:
Current Share Price: $91.91
52-Week Range: $67.93 to $92.40
Dividend: $2.28 per share which yields 2.5%
2012 Earnings Estimate: $7.60 per share
2013 Earnings Estimate: $8.16 per share

Key Data Points For Chevron From Yahoo Finance:
Current Share Price: $117.14
52-Week Range: $86.68 to $118.22
Dividend: $3.60 per share which yields 3.1%
2012 Earnings Estimate: $12.91 per share
2013 Earnings Estimate: $12.49 per share

Key Data Points For Kodiak Oil & Gas From Yahoo Finance:
Current Share Price: $9.62
52-Week Range: $2.43 to $10.90
Dividend: none
2012 Earnings Estimate: 44 cents per share
2013 Earnings Estimate: 76 cents per share

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Source: This $2 Bakken Oil Stock With A $5 Price Target Is Poised For A Short Squeeze