Hello everyone,
The story of oil is one of fame and fortune that is riddled with controversy.
From the Rockefellers to the Buffetts, oil has been the lifeblood of the global economy and an excellent investment for many.
While society is certainly striving for a greener planet, the reality is that oil is expected to stay; at least for the foreseeable future anyway.
With an estimated 1.4 trillion barrels of oil left in the world (47 years worth), and 100 million barrels consumed each day, oil is a vital piece of the majority of businesses and households.
Currently, the price of oil skyrocketed (WTI Crude: $106.24 USD, +45% Change YTD) in large part due to sanctions imposed on Russia for their invasion of Ukraine, and the consequences of high inflation.
Although people around the world are feeling a lot of pain at the pumps, oil stocks are taking off this year with many trading at all-time highs.
So as an investor, the question is whether or not it is worth it to ride the oil wave and invest in the energy sector?
In this newsletter, we will explain why we are bullish on the oil industry, why the current trends are set to last, and five small-cap oil stock picks we believe have huge upside potential.
The Oil Industry at a Glance
After an incredible stretch during Covid-19 where the price of crude oil fell as low as $19 a barrel, 2022 is a whole new story with prices currently sitting at $106.
According to IBIS World, the global oil industry generated a -1.0% CAGR over the past five years and captured roughly $1.70 trillion of revenue in 2021.
That being said, global oil revenue is expected to reach $3.87 trillion in total sales by the end of the year, if current prices continue to hold.
In 2022, 10 out of 10 of the top-performing S&P 500 stocks are energy stocks with the lowest of them being Coterra Energy (CTRA) returning 45.11% YTD.
While the industry is composed of many large players such as Exxon (XOM), Chevron (CVX), and Shell (SHEL), the industry itself has nearly 30,000 businesses competing in the U.S. within various segments of the markets, according to IBISWorld.
All in all, the IEA expects that world oil demand growth is forecast to slow to 1.9 mb/d in 2Q22 from 4.4 mb/d in 1Q22 and is now projected to ease to 490 kb/d on average in the second half of the year on a more tempered economic expansion and higher prices.
Three reasons why we are bullish on oil stocks in 2022
- The EU declared a ban on 90% of Russian oil imports by the end of 2022. Since Russia is the third-largest oil producer in the world and supplies the EU with 27% of their oil and 40% of their gas imports, the supply of oil made available globally is expected to decrease; meaning prices will rise.
- Legendary investor Warren Buffett is bullish on oil with his purchase of $7.5 billion of Occidental Petroleum (OXY) in Q1 2022; OXY is up 92.76% YTD.
- Jamie Dimon, CEO of JPMorgan Chase, America’s largest bank by market cap, discussed oil recently stating, “We are not taking the proper actions to protect Europe […] and you all (Average households) towards capping oil in the next 5 years. Which means it almost has to go up in price.”
Three risks to consider when investing in oil stocks in 2022
- The oil industry is a highly cyclical market due to its relationship with the volatility of oil prices, therefore the current landscape may shift fairly quickly if oil prices were to change.For example, oil went from over $107 a barrel in July 2014 to around $20 in March 2020, and back to $120 a barrel in 2022.
- Oil projects require large sums of capital investment and financing, meaning that Free Cash Flow may be hurt during underperforming stages in the business cycle.To put it in perspective, here is the CAPEX of the largest oil stocks from 2021:
⛽️ Exxon (XOM): $12.1 billion
⛽️ Chevron (CVX): $8.1 billion
⛽️ Shell (SHEL): $4.8 billion
- The Oil industry is a heavily regulated market due to the environmental risks linked with the business. For example, the costs incurred by an oil company if an oil spill happens could be between $2.4 to $9.4 billion dollars.
How to find hidden gems in the Small Cap Market
The Edge Investment strategy is guided by four overarching principles that we use for all of our investment decisions.
First, we want to be sure that we understand the business well; an example might be that we are consumers of their product already or perhaps have intimate industry knowledge ourselves.
When evaluating our understanding of the business, it is important to consider if the stock’s story clicks and whether the industry itself is favorable in both the near and long term.
Second, the company should possess a unique competitive advantage over its peers that is sustainable for many years to come.
Using performance metrics that are specific to the industry is an excellent way to gain perspective on this competitive advantage.
Third, it is important to find stocks with sound management who are invested in the company themselves and have demonstrated a level of success as a leader in the past (ie. What is their track record?).
Lastly, and specifically in this market, we ideally want to purchase stocks that we believe are undervalued and possess a long cash runway ahead of them; that way if things go South, our losses are mitigated by adding the margin of safety.
Top five small-cap oil stocks to add to your watchlist
Now that we explored the oil industry more in-depth, here are five small-cap stocks that embody most, if not all, of the characteristics we look for when making an investment decision.
Tenaz Energy (TNZ.TO)
Market Cap: $64.03 million CAD
Price: $2.25 CAD
YTD Change: -30.34%
CEO: Anthony Marino
Tenaz Energy Corp. (TSX: TNZ) is a public energy company focused on the acquisition and sustainable development of international oil and gas assets capable of returning free cash flow to shareholders.
In addition, Tenaz conducts the development of a semi-conventional oil project in the Rex member of the Upper Mannville group at Leduc-Woodbend in central Alberta.
- BOE per day: 1,015 BOE/d (2021)
- Revenue by Products:Crude oil = $12.78 mil. (71.66%)Natural Gas Liquids = $1.21 mil. (6.78%)Natural Gas = $3.84 mil. (21.56%)
- Debt to OCF: 0%
Cardinal Energy (CJ.TO)
Market Cap: $1.25 billion CAD
Price: $7.77 CAD
YTD Change: +81.97%
CEO: M. Scott Ratushny
Cardinal Energy Ltd. (CJ.TO) engages in the acquisition, exploration, and production of low decline light, medium, and heavy quality oil, and natural gas in Western Canada.
It has operations in the provinces of Alberta and Saskatchewan.
- BOE per day: 20,731 BOE/d (2021)
- Revenue by Products:Crude oil = $413.12 mil. (92.82%)Natural Gas Liquids = $11.95 mil. (2.68%)Natural Gas = $20.00 mil. (4.49%)
- Debt to OCF: 95.72%
Athabasca Oil Corp. (ATH.TO)
Market Cap: $1.49 billion CAD
Price: $2.61 CAD
YTD Change: +119.33%
CEO: Robert Broen
Athabasca Oil Corporation engages in the exploration, development, and production of light and thermal oil resource plays in the Western Canadian Sedimentary Basin in Alberta, Canada.
The company produces light and medium crude oil, tight oil, conventional natural gas, shale gas, natural gas liquids; and bitumen from sand and carbonate rock formations.
- BOE per day: 34,618 BOE/d (2021)
- Revenue by Products:Crude oil = $1,013.75 mil. (95.70%)Natural Gas Liquids = $30.144 mil. (2.85%)Natural Gas = $15.395 mil. (1.45%)
- Debt to OCF: 122.36%
Crew Energy Inc. (CR.TO)
Market Cap: $751.07 million CAD
Price: $4.91 CAD
YTD Change: +71.33%
CEO: Dale O. Shwed
Crew Energy Inc. engages in the acquisition, exploration, development, and production of crude oil, natural gas, and natural gas liquids (NGL) in Canada.
It primarily holds interests in Septimus, West Septimus, Groundbirch/Monias, Tower, and Attachie, areas located in the southwest, south, and west of Fort St. John in British Columbia.
- BOE per day: 26,443 BOE/d (2021)
- Revenue by Products:Crude oil = $21.76 mil. (6.54%)Natural Gas Liquids = $18.53 mil. (5.57%)Condensate = $77.74 mil. (23.36%)Natural Gas = $214.82 mil. (64.54%)
- Debt to OCF: 259.34%
Ring Energy Inc. (REI)
Market Cap: $345.71 million USD
Price: $3.24 USD
YTD Change: +41.89%
CEO: Paul D. McKinney
Ring Energy, Inc., an exploration and production company, engages in the acquisition, exploration, development, and production of oil and natural gas in Texas and New Mexico.
As of December 31, 2021, the company’s proved reserves consisted of approximately 77.8 million barrels of oil equivalent. Ring Energy primarily sells its oil and natural gas production to end-users, marketers, and other purchasers.
- BOE per day: 8,518 BOE/d (2021)
- Revenue by Products:Crude oil = $181.53 mil. (92.47%)Natural Gas = $14.77 mil. (7.53%)
- Debt to OCF: 355.90%
Which of these stocks do you think is the best?
Take the survey below to share your opinion and for a chance to be a shoutout on our Instagram!
Tune in to our next newsletter for an in-depth analysis of the best 1-3 stocks listed above, as well as our buy/ sell recommendations.
This newsletter is written by Kevan Matheson, Founder & CEO of Edge Investments.
Prior to starting Edge, Kevan was an Institutional Analyst at RBC Global Asset Management, one of North America’s largest fund managers, with assets under management in excess of $400 billion.
After spending the majority of his career focused on large market capitalization public companies, Kevan became attracted to the risk/reward proposition of growth stocks and cryptocurrency.
In 2017 Kevan published a book on investing in cryptocurrency, where he speculated on the coming growth in NFTs and the underlying tokens that power their ecosystems.
Known in the growth stock community as Small Cap Kev, his current passion is finding stocks in disruptive industries like blockchain, psychedelic medicine, plant-based meat alternatives & much more.
Follow Small Cap Kev & his team on Instagram, TikTok, YouTube, and LinkedIn.
This article was written in collaboration with Edge Investments’ analyst & writer, Declan O’Flaherty
Declan holds a Bachelor of Commerce from the University of Alberta and has over 2 years of experience investing in financial markets.
As a value investor, Declan embraces the lessons of Warren Buffett and his disciples when making investing decisions. With an emphasis on business fundamentals, his strategy focuses on finding stocks with excellent management, a competitive advantage, and those that are selling at discount to their real value.