Looking For Risk? Take A Look At These Micro Cap Oil And Gas Producers

by: Michael Filloon

If one is looking for a high risk/reward scenario, nano caps can be the best way to leverage an investment. This is not a well known term but relates to a company with a market cap of less than $50 million. Micro cap is a better known term of a market cap between $50 to $300 million. Oil and Gas producers of this size not only provide an increased upside, but offer risk most investors would like to avoid. A ten percent move in these companies can happen for little or no reason. Because of the large moves, these stocks are targeted by day traders. I have compiled a list of oil and gas producers that qualify as nano and micro caps. This list will help identify smaller oil and gas players for those interested in this level of risk.

Blue Dolphin (OTCQX:BDCO) operates as an oil and gas exploration and production company. Blue Dolphin has been in operation for over 25 years. It has over 71 miles of pipeline in the Gulf of Mexico. It also has interests in three separate offshore oil and gas production leaseholds.

  1. Galveston 321: 0.5% overriding royalty interest
  2. High Island 115: 2.5% working interest
  3. High Island 37: 2.9% working interest

Blue Dolphin has a 7% working interest in Indonesia. This North Sumatra Basin-Langsa Field could be a very large oil find, especially for a company this size. Blue Dolphin is in the process of divesting its pipeline assets for the purpose of expanding its oil and gas portfolio.

After a very large move in February of this year, the stock price has pulled back from $8.42 and closed at $2.46 on Wednesday. Blue Dolphin resumed trading on the Nasdaq last month after a brief de-listing. Second quarter of 2011 numbers were a loss, but there was a slight improvement year over year. Revenue increased to $620000 from $483000 a year earlier for the quarter. Net loss per share was 20 cents vs. 22 cents in the second quarter of 2010. One positive metric, Blue Dolphin has is a one year EPS growth of 77.55%. It is hard to know what Blue Dolphin's future holds. I like its move from the pipeline business to a straight oil and gas producer. The key is its assets in Indonesia, as this has the possibility of being a very large oil producer.

Cano Petroleum (NYSEMKT:CFW) has seen better times. The one analyst covering it has Cano losing 15 cents/share this year. It has missed earnings for four straight quarters. Each quarterly miss was at least 100%, with the largest miss being 300%.

Cano has acquired a series of assets over the years, for the purpose of using secondary and enhanced oil recovery methods to obtain resource. Its assets are located in New Mexico, Oklahoma and Texas. These acquisitions have been paid for through the issuance of stock. This stock dilution has been part of the reason Cano trades for 18 cents per share, down from $1.13 two years ago. Third quarter of 2011 results saw operating quarterly revenues increase 16% year over year. Cano saw oil sales volumes decrease, but realized a higher sales price. It lost 11 cents per share for the quarter. The problems with Cano's business seem to be too large to be optimistic about its future. I would not buy Cano as it will have to continue to cut shares to maintain its business even if oil prices continue to improve.

Earthstone Energy (NASDAQ:ESTE) is a small oil company headed in the right direction. I have been following this name for a while now, and have noticed a change in Earthstone's strategy. Up until recently, Earthstone was acquiring assets. Many of these assets were underperforming wells that Earthstone would rework to increase production. It has producing properties on shore in the Gulf Coast. Its Rocky Mountain assets are in Montana, North Dakota, Wyoming and Colorado.

Earthstone has changed the emphasis of its business, and is now acquiring small working interests in Bakken wells. This non-operative approach has been lucrative for many small oil companies in North Dakota and Montana. In the first quarter of 2011, Earthstone reported revenues of $2.5 million vs. $1.7 million in the first quarter of 2010. It had net income of $665,000 vs. $378,000 in the first quarter of last year. Oil production for the quarter was a little less than the year prior, but natural gas production was significantly higher. It received an oil price of $96.93/barrel, and $9.33/Mcf.

Earthstone is active in Banks Field of McKenzie County in North Dakota. It has working interest in Zenergy and Brigham (BEXP) wells. It has very small working interests in three completed wells that are still confidential. What is interesting is that its wells that have not been completed. Its four upcoming wells are being operated by Brigham. Brigham's most recent well had an IP rate of 2746 Bo/d. More importantly, the well has produced over 38 thousand barrels of oil in the first 33 days. The two wells not on a confidential list, produced around 500 barrels of oil in the first 24 hours of production. This shows Brigham's ability to get more out of each Bakken well. I am bullish Banks Field, as it has had very good results as of late. Earthstone also has non-operated interest Indian Hill Field in McKenzie County. This well is operated by Continental (NYSE:CLR).

Earthstone is compelling. It had a very good quarter and was able to realize very high oil and gas prices. As the Brigham wells come on line, I would expect it will provided revenue to purchase further interests in wells. Earthstone seems to prefer working with Brigham over other producers. This is not surprising based on results. In my opinion, this is a very good business move and like Earthstone's prospects.

HKN Inc. (HKN) has made a major change to its business model over the past year. It sold its investment in Spitfire Energy of Canada and now has a large ownership in Britewater International. HKN plans to increase its ownership from 98.17% to 100% in the third quarter of this year making Britewater a wholly owned subsidiary. It has interest in Britewater based on its technology that recovers oilfield emulsions. This technology is patented and recently it was announced that a subsidiary of Britewater is evaluating the construction of a processing plant in Alaska.

HKN is more a play on its Britewater technology than its oil and gas business. It is an interesting process, but there is no concrete evidence this will drive earnings in the short term. The second quarter of 2011 results were well below that of a year earlier. It realized increased oil prices but these were more than offset by lower production due to weather related issues. Most importantly is its share dilution due to its purchasing of Britewater. Overall it realized a 2 cent loss for the quarter compared to a gain of 17 cents a year earlier. I think HKN is worth watching, but I would not invest in the name until improvements are seen, and the company becomes profitable again. It is very difficult to value this company based on its Britewater purchase until we know this technology will improve its business.

Mexco Energy (NYSEMKT:MXC) currently operates 17 wells. It also has working interests in more than 2700 gross or 26 net wells. In the first quarter of 2011, Mexco made a profit. Revenues were $909,094 vs. $836,393 in the first quarter of last year. Production expenses were $227,902 vs. $368,227 in the same quarter of 2010. Mexco earned 5 cents/share. Mexco is a very small oil and gas production company that purchases very small working interests in wells throughout the United States. Due to its size, it has significant leverage to the price of oil and would significantly benefit from rising oil prices.

Royale Energy (NASDAQ:ROYL) use to be a pure natural gas play, but it has shifted some of its production to oil. Royale is an operator and sells working interests in those wells. It has interests in California, Utah, Texas, Oklahoma, and Louisiana. In July of this year, Royale posted earnings for the second quarter of this year. It has over 9000 net developed and over 11,000 net undeveloped acres in California. Outside of California, Royale has approximately 1800 net developed and almost 14,000 net undeveloped acres. Royale has begun selling interests in the wells it operates. The revenue from its turnkey drilling business, has allowed Royale to become profitable. Royale has also been able to keep decreasing costs which has improved its bottom line.

Lucas Energy (LEI) is a small oil and gas company that initially made its business of purchasing shut in, abandoned or poor producing wells. These wells are re-worked to start or increase production. Lucas has 15,000 gross acres in Gonzales, Wilson, Karnes, and Atascosa Counties in Texas. These have been productive oil producing counties in the Eagle Ford. Lucas has been involved in several JVs, most notably its Marathon (NYSE:MRO) agreement. When Marathon purchased Hilcorp, it also acquired its JV with Lucas. In September, Lucas signed an agreement to pay $22 million for Nordic Oil's acreage in Gonzales Karnes, and Wilson counties. Nordic Oil signed a letter of intent to purchase Lucas' New Mexico properties for four million in cash. In my opinion the purchasing of assets was good for both companies. I like Lucas as it has some very good acreage. Its acres have multiple pay zones, which could provide well spacing of 20 to 40 acres. I really like Lucas' prospects, it has pulled back significantly from its 52 week highs. It might be worth the risk at this valuation.

Lynden Energy (OTCPK:LVLEF) is a play on the Permian and Paradox Basins. It has 15,500 acres in the Wolfberry. It has a 300,000 acre AMI (Area of Mutual Interest). Lynden expects to double its production in the Wolfberry to 450-500 Boe/d by year end. It has a 2011 cap ex of $18 million. Lynden estimates it will drill a total of 18 new Wolfberry wells this year. Its Mitchell Ranch Project encompasses 100,000 acres and a 300,000 acre AMI. Lynden has several reasons to be optimistic about its Mitchell Ranch and Wolfberry interests. Both have multiple pay zones. The Wolfberry is very consistent, while Mitchell Ranch could be a huge find with six possible conventional targets and one horizontal. Wells in the Permian Basin are generally inexpensive compared to other deeper shale plays such as the Bakken. Lynden has 85,000 acres in the Paradox Basin, which is a play on natural gas. I really like Lynden. This company has a huge amount of upside that I believe has not been figured into its valuation. If Mitchell Ranch is as good as Lynden estimates, this stock could easily triple.

This is a brief list of some very small oil and gas plays with acreage in the United States. These names are speculative so be very careful as these names could depreciate significantly in a short period of time. The pullback in many of the oil names has brought some of these smaller market caps back to a reasonable level. If you are an investor looking for risk, these names are worth a look.

Disclosure: I am long LVLEF.PK, BEXP.

Additional disclosure: This is a list of oil and gas stocks with market caps below $100 million. It is only a list and is not a buy recommendation.