With mass coronavirus programs now at full speed in most industrialized countries, the global oil market is witnessing a strong rebound with rising industrial activity and production cuts by OPEC+. Oil prices climbed further following the 14th OPEC and non-OPEC Ministerial Meeting on March 4. At the meeting, OPEC and non-OPEC ministers agreed to maintain March’s production levels through April. Saudi Arabia added that it would extend its 1mb/d voluntary production cut into April. Following the meeting, the international benchmark Brent crude futures gained 4.15%, to trade at $66.74 per barrel, while U.S. West Texas Intermediate (WTI) crude futures gained 4%, to trade at $63.83 per barrel.
Furthermore, the attack on Sunday by Yemen’s Houthi rebels on Saudi Aramco’s oil facilities pushed prices to their highest level since January 2020, with Brent Crude trading as high at $71.38.
Amid this scenario–when the global oil sector is prospering–small-cap companies can offer investors more room for growth than their larger counterparts. That is why we believe small-cap energy companies ARC Resources Ltd. (AETUF) and California Resources Corporation (CRC) are well-positioned to benefit from this trend.
ARC Resources Ltd. (AETUF)
Based in Canada, AETUF explores, develops, and produces crude oil, condensate, natural gas liquids (NGLs) and natural gas. The company holds interests primarily in the Montney properties and Pembina Cardium properties.
Last month, AETUF and Seven Generations agreed to combine their businesses and entered an agreement to do so through an all-share transaction valued at approximately $8.1 billion. The strategic combination of the two premier Montney producers is expected to generate significant free funds flow through a responsible and disciplined approach to development, while creating superior and enduring value for all shareholders. With its increased size and scale, the combined company expects to have improved access to capital and greater relevance in the global energy market.
Despite uncertain market conditions, AETUF strengthened its business in 2020 through prudent capital allocation decisions and excellent operational execution. AETUF’s total crude oil production witnessed a slight sequential increase to 15,554 bbl/day in the fourth quarter, ended December 31, 2020. Its revenue from commodity sales increased 10.8% year-over-year to C$351.90 million in the fourth quarter. Its net income has increased significantly from its year-ago value to C$120.80 million, yielding an EPS of C$0.34 over the same period.
Analysts expect AETUF’s revenues to grow 41.1% year-over-year to $282.91 million in the current quarter (ending March 31, 2021). A consensus EPS estimate of $0.07 for the quarter represents a 57.9% improvement from its year-ago value. The stock has gained 32.5% year-to-date.
The POWR Ratings are also high on AETUF. It has an Overall Rating of A, which translates to a Strong Buy. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.
AETUF also has an A grade for Growth and Sentiment, and a B for Momentum and Quality. Within the Energy – Oil & Gas Industry, it is ranked #1 of 95 stocks.
In total, we rate AETUF on eight different levels. Beyond what we stated above, we also have given AETUF grades for Stability and Value. Get all AETUF’s ratings here.
California Resources Corporation (CRC)
CRC is an independent oil and natural gas exploration and production company in California. The company gathers, processes and sells its production to marketers, California refineries, and other purchasers that have access to transportation and storage facilities. It is also engaged in the generation and sale of electricity to the local utility, other third parties, and the grid.
In January, CRC announced a private offering of $600 million of senior unsecured notes due 2026. The company intends to use the proceeds to repay in full its second lien term loan and all outstanding senior secured notes due 2027, with the remainder to be used to repay a portion of the outstanding borrowings under a revolving credit facility. This should improve the company’s capital efficiency.
Also in January, CRC launched a streamlining leadership team and several functional realignments to better position itself to focus on implementing additional cost reductions, maintaining capital discipline and asset rationalization. According to the company, the organizational changes should result in one-time charges of approximately $5 million but is expected to reduce CRC’s run rate costs by approximately $8 million per year going forward.
CRC’s total revenues have increased 48.2% sequentially to $409 million in the third quarter, ended September 30, 2020. Its adjusted EBITDAX has risen 442.1% from the previous quarter to $103 million, while its EPS has improved substantially to $2.20 over the same period. The stock has gained 8.1% year-to-date and is currently trading 9.2% below its 52-week high.
It is no surprise that CRC has an overall B rating, which translates to Buy in our POWR Ratings system. CRC has a B grade for Quality, Momentum, and Sentiment. In the same industry, the stock is ranked #6.
Click here to see the additional POWR Ratings for CRC (Growth, Stability and Value).
The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.
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AETUF shares were trading at $6.34 per share on Tuesday afternoon, up $0.21 (+3.43%). Year-to-date, AETUF has gained 33.47%, versus a 4.15% rise in the benchmark S&P 500 index during the same period.
About the Author: Rishab Dugar
Rishab is a financial journalist and investment analyst. His investment approach is to focus on quality stocks, trading at low prices, with business models that he readily understands. More…
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