Let’s Talk Small-Cap Energy

Small Cap Energy

I’ve been paying very close attention to oil prices over the last few months. Brent crude oil prices blew through my $75 price target about a month ahead of time. I don’t see this slowing down, especially as more investors are interested in swelling commodity prices. Goldman Sachs has suggested oil prices will hit $100 later this year. This week, energy executives at the Qatar Economic Forum said that they project robust demand for oil and higher prices. This is a very ambitious number. I don’t expect that oil prices will get to that point. But I do see Brent crude moving above $80 in the months ahead.

I think that Exxon Mobil Corporation (NYSE:XOM) is an excellent company with a great dividend. But I worry about the recent move by activist fund Engine No. 1 to secure two board seats and point the company in a more friendly “climate” direction. If it ends up that Exxon pours lots of money into the economic interests of the activist fund, I’m going to be pretty bearish about the energy giant’s future. At $65 per share, I’m not interested in what is happening with XOM right now.

Small-Cap Energy Stocks

I’m more interested in what is happening at lower prices. So, I’m looking for stronger momentum in two assets trading under $10. The first is the Invesco S&P SmallCap Energy ETF (NASDAQ:PSCE). This is a diverse ETF that holds various small-cap energy firms that have attractive upside. It’s tough to just point to one company and expect crude to lift it. Different firms have different breakeven prices on production.

So, I’m happier to look at a rising tide to lift all boats. The ETF has a diverse portfolio that includes PDC Energy, Range Resources Corp., Matador Resources, and Southwestern Energy Co.

On the other side, I’m looking at Transocean (NYSE:RIG). The offshore energy industry has struggled over the last few years. And RIG shares have fallen off a cliff in the previous year. But a signal appeared this week that gathered my attention.

Two owners – companies that own more than 10% of the stock – have been pouring into the stock. Tens of millions of dollars of RIG were purchased in the last two weeks. Meanwhile, an unknown speculator came in this week and purchased 25,000 calls at $6 for a November expiration date. Now, I don’t care if that speculator sells them at any point in the next few months should the underlying stock rally.

I care that these contracts exist. Because their creation means that they will only be executable if the stock does get above $6.00. At today’s prices, anyone who holds these contracts believes that the stock will get back to that $6 level. That’s more than 30% higher than today’s prices.

RIG has a lot of risks. It has a lot of debt. But higher energy prices and greater offshore exploration in a time of rising energy prices could get this small-cap energy stock back above $5 to $6 in the coming months. When people are speculating, the best way to do it is to get out ahead of companies that other people will take a second look at in the months ahead.

In a worst-case scenario, investors can buy RIG for around $4.50 and set a trailing stop down around $4.00. Keep in mind that those big buyers have a lot of skin in the game. And when you’re sitting at the Board level, you’re pushing for changes that will improve the balance sheet and drive the stock higher.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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