With oil (NYSEARCA:USO) up almost $2 today, Royale (NASDAQ:ROYL) is up 38% and other small-cap high beta oil names like Magnum Hunter (MHR) and Gulfport (NASDAQ:GPOR) are running. ROYL has been a good first indicator for price rallies in both the oil commodity as well as in other oil stocks. With ROYL up substantially, perhaps now is the time to look off the beaten path for high growth oil investments, while capturing some margin of safety by buying them at a discount to their "intrinsic value."
One example of such a stock is Gale Force Petroleum (OTCQX:GFPMF). Gale Force has grown from 150 boepd in June of last year to over 460 boepd now, and is expecting to reach 1000 boepd by the end of March next year. Its production is over 80% oil, cash flow is ramping, and operationally the company is achieving significant momentum. The stock hasn't kept pace, down from 35 cents in May to 25 cents currently. If there is another oil price rally similar to the one earlier this year, Gale Force's stock could surge like Royale's has. And if there isn't, Gale Force trades at a big discount to its proved reserve value and a bigger discount to its production value, so there is a margin of safety. And if Gale Force just maintains its existing value per boepd, the stock could double in the next 6 months as the company doubles its production.
Another example is Austex Petroleum (OTC:ATXDF). Austex is active in the Mississippian play in Oklahoma and Kansas. It trades at a discount to its peers such as Osage Exploration (OEDV.OB) and Red Fork (OTCPK:RDFEF). Austex recently announced two excellent vertical well results - one vertical well IP'd at 160 boepd and the other achieved 90 boepd (without a pump - it could produce more once a pump is put on it). For ~$700,000 wells, these production rates are extremely strong and the wells should earn triple digit IRRs. Austex is currently at over 400 boepd, and with these two new wells plus another two wells a month going forward, it could grow very rapidly and achieve a much higher valuation than its current price.
And a third example is Dejour (DEJ). Dejour recently drilled a much-anticipated well in its Kokopelli area, where it hit 2,500 feet of Lower Mesa Verde formation. Dejour estimates the proved reserve value of its Kokopelli field at almost $100 million, versus a current $35 million market cap, and additional "probable" potential of even more than that. As Dejour achieves success at Kokopelli, its stock could start to price that in. Also, Dejour stock has traded similarly to high beta oil stocks like ROYL in the past, so a surge in ROYL stock price could be a positive signal for its stock.
In summary, ROYL stock surging is a positive indicator for other small-cap oil stocks, and there are great bargains available among such small oil stocks, including Gale Force, Austex, and Dejour. I have positions in all three.
Disclosure: I am long OTCQX:GFPMF, OTC:ATXDF, DEJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am also short a very small amount of USO as a hedge