The energy market has faced volatility recently, driven by concerns over global economic growth and fluctuating oil prices. However, with the potential for interest rate cuts by the Federal Reserve, now might be an opportune time to consider investing in small-cap energy stocks like VAALCO Energy, Inc. (EGY), Obsidian Energy Ltd. (OBE), Adams Resources & Energy, Inc. (AE), with big upside potential.

Oil prices have been under pressure due to higher supply from OPEC+ and fears of slowing demand, particularly from China. However, short-term market dynamics are creating opportunities for investors in the energy space. For example, oil prices rose over 1% recently, driven by supply disruptions caused by Hurricane Francine in the U.S. Gulf of Mexico.

Brent crude futures rose to $72.53 per barrel, while U.S. crude reached $69.77 per barrel. While short-term gains reflect the impact of the hurricane, the broader market remains focused on the upcoming Federal Reserve rate decision, which will likely set the tone for economic activity in the months ahead.

Lower interest rates have historically boosted economic activity and, in turn, increased demand for oil. While a 50-bps rate cut could signal economic weakness, it could also catalyze growth in small-cap energy stocks, which tend to outperform in low-rate environments. Moreover, the U.S. Energy Information Administration (EIA) projects global oil demand will hit a new record of 103.1 million barrels per day in 2024.

With that in mind, let’s analyze the fundamental aspects of the featured Energy – Oil & Gas stocks, starting with the third choice.

Stock #3: Adams Resources & Energy, Inc. (AE)

With a market cap of $61.93 million, AE is engaged in marketing, transporting, terminalling, and storing various crude oil and natural gas basins in the United States. It operates through four segments: Crude Oil Marketing; Transportation; Pipeline and Storage; and Logistics and Repurposing.

On August 7, the company’s Board of Directors declared a dividend of $0.24 per common share for the second quarter, payable to its shareholders on September 27, 2024. AE pays an annual dividend of $0.96, which translates to a yield of 3.98% at the current share price. Moreover, its four-year average dividend yield is 3.20%.

In terms of trailing-12-month, AE’s asset turnover ratio of 8.03x is considerably higher than the industry average of 0.49x.

AE’s total revenues increased 15% year-over-year to $718.49 million for the second quarter that ended June 30, 2024. Its adjusted EBITDA stood at $4.20 million, while its cash inflow from operating activities amounted to $8.32 million compared to an outflow of $27.32 million in the prior-year quarter. At the end of the period, the company’s cash and cash equivalents, including restricted cash, improved by 179.5% from its year-ago value to $49.64 million.

Street expects AE’s EPS and revenue for the fourth quarter (ending December 2024) to be $0.03 and $707.60 million, respectively. The company has topped the consensus revenue estimate in each of the trailing four quarters, which is promising.

Moreover, over the past three years, its revenue and levered FCF have grown at impressive CAGRs of 28.9% and 25.8%, respectively.

Over the past month, the stock has gained 7.2%, closing the last trading session at $24.12. Its 12-month price target of $38.75 reflects a 60.7% potential upside.

AE’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It also has a B grade for Value. Among the 80 stocks in the Energy - Oil & Gas industry, it is ranked #12. Click here to see the other AE ratings for Growth, Momentum, Stability, Sentiment, and Quality.

Stock #2: Obsidian Energy Ltd. (OBE)

OBE is a Canada-based exploration and production company focused on developing oil and natural gas properties in Western Canada’s Sedimentary Basin. The company operates a portfolio of assets, producing approximately 35,700 barrels of oil equivalent (boe) per day. Its operations include the exploration, development, and management of oil and natural gas interests and related production infrastructure. It has a market cap of $441.68 million.

On June 26, the company completed its acquisition of 1,700 boe/d of Clearwater oil production and 148 net sections of land in the Peace River area for approximately $80.5 million. The deal, effective May 1, 2024, expands the company’s holdings and adds 200 potential drilling locations.

OBE’s CEO, Stephen Loukas, stated that the acquisition aligns with their 2024-2026 growth plan and enhances development opportunities, especially in their successful Clearwater Dawson area.

OBE’s trailing-12-month EBITDA margin of 61.11% is 72.9% higher than the 35.34% industry average. Similarly, its 63.60% trailing-12-month gross profit margin is 41.5% above the 44.94% industry average.

For the fiscal second quarter that ended June 30, 2024, OBE reported a 25.5% year-over-year increase in production revenues of $208.40 million. Its funds flow from operations grew by 31.8% from the prior year’s quarter to $115.20 million, while its FFO per share stood at $1.44, up 39.8% year-over-year.

The company’s net income amounted to $37.10 million and $0.46 per share, reflecting an improvement of 101.6% and 109.1% from the year-ago quarter, respectively. Moreover, its cash flow from operating activities increased by 16.1% year-over-year to $77.90 million.

The consensus EPS estimate of $1.44 for the current year (ending December 2024) indicates a 51.9% improvement year-over-year. The consensus revenue estimate of $625.21 million for the same period reflects a 16.9% increase from the prior year.

Over the past three years, its revenue and EBITDA have grown at respective CAGRs of 26.1% and 38.2%. Likewise, its tang book value has increased at a 35.8% CAGR over the same time frame.

The stock has lost 13.9% over the past month to close the last trading session at $5.80. However, its 12-month price target of $11.77 indicates a 102.9% potential upside.

OBE’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, translating to Buy in our proprietary rating system.

It has a B grade for Value and Sentiment. Within the same industry, it is ranked #6. To see additional POWR Ratings for OBE for Growth, Momentum, Stability, and Quality, click here.

Stock #1: VAALCO Energy, Inc. (EGY)

With a $579.92 million market cap, EGY acquires, explores, develops, and produces crude oil, natural gas, and natural gas liquids in Gabon, Egypt, Equatorial Guinea, and Canada.

On August 6, demonstrating its commitment to returning value to shareholders, the company declared a quarterly dividend of $0.0625 per share ($0.25 annualized), which is payable on September 20, 2024, to stockholders of record at the close of business on August 23, 2024. EGY’s annual dividend translates to a yield of 4.47% at the current share price, while its four-year average dividend yield is 2.16%.

In April, the company completed the all-cash acquisition of Svenska Petroleum Exploration AB for $40.2 million, enhancing its production capacity in the Baobab field, now producing over 5,000 barrels of oil equivalent per day (99% oil).

This acquisition strategically expands EGY’s presence in West Africa, particularly in Cote d’Ivoire, an investment-friendly country with significant upside potential. Further, the move bolsters EGY’s growth prospects and regional operational footprint.

The stock’s trailing-12-month gross profit and EBITDA margins of 64.19% and 58.43% are 42.8% and 65.3% higher than the industry averages of 44.94% and 35.34%, respectively. Likewise, its 32.31% trailing-12-month levered FCF margin compares favorably to the 6.50% industry average.

During the second quarter (ended June 30, 2024), EGY’s revenue increased 6.9% year-over-year to $116.78 million. Its adjusted net income amounted to $22.58 million and $0.22 per share, reflecting a year-over-year improvement of 70.2% and 83.3%, respectively. In addition, its adjusted EBITDAX stood at $72.47 million, up 10.9% year-over-year.

Analysts expect EGY’s revenue to increase 28.8% year-over-year to $149.79 million for the current quarter (ending September 2024), while its EPS is expected to grow considerably from the prior year to $0.18 in the same period. Also, the company has surpassed the consensus EPS estimates in three of the trailing four quarters, which is impressive.

Moreover, the stock’s revenue and net income have grown at impressive CAGRs of 60.1% and 63.2% over the past three years, respectively. Similarly, its EPS has grown at a 33.8% CAGR over the same period.

EGY’s shares have gained 31.2% over the past year and 24.5% year-to-date to close the last trading session at $5.59. Its 12-month price target of $9.40 reflects a 68.2% potential upside.

It’s no surprise that EGY has an overall rating of B, which equates to Buy in our proprietary rating system. It has a B grade for Value, Sentiment, and Quality. Out of 80 stocks in the same industry, it is ranked #5.

In addition to the POWR Ratings we’ve stated above, we also have EGY’s ratings for Growth, Momentum, and Stability. Get all EGY ratings here.

What To Do Next?

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EGY shares were trading at $5.71 per share on Monday afternoon, up $0.12 (+2.15%). Year-to-date, EGY has gained 31.72%, versus a 19.11% rise in the benchmark S&P 500 index during the same period.

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.

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