There are myriad ways for investors to get exposure to the energy sector, but too often that means playing the same old boring big cap stocks like Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) or an ETF like the Energy Select Sector SPDR (NYSE: XLE). Or slightly, but only slightly, more adventurous approach might mean owning a foreign integrated oil stock or a U.S. independent like Apache (NYSE: APA) or Devon Energy (NYSE: DVN).
These are all fine stocks and we’re certainly not knocking them. However, the larger the market cap for an energy stock, the slower moving it is. Translation: A company like Exxon or Chevron surely benefits from rising oil and natural gas prices in terms of earnings per share, but the stocks are slow to react to near-term positive changes in oil prices.
This is where investors and especially traders can benefit with microcap energy stocks.
Royale Energy is by far the most volatile name highlighted here. The shares soared over 18% on 2/13 and on 2/17 it climbed another 13% on volume that was about five times the daily average.
Current year gains topped 52% on 2/27 but it has recently rolled back to attractive entry levels.
California-based Royale Energy is an independent oil and gas producer, meaning it has no refining operations like Exxon and Chevron do. That’s not a bad thing in an environment of depressed refining margins. Royale Energy owns wells and leases located principally in the Sacramento Basin and San Joaquin Basin in California, as well as in Utah, Texas, and Louisiana. Founded in1986, Royale Energy today has more than 16 million barrels of proven oil reserves.
Over $1 billion in reserves
Assuming the price of oil stays around $100 per barrel and Royale finds no more oil (unlikely in our view), the companies reserves are worth well over $1 billion, but the company has a market value of just $54 million implying the stock trades at a substantial discount to the sum of the company’s parts.
“Cash has increased 10% to $5.1 million since 2010. In addition to an increase in oil and gas producing properties, as Royale’s balance sheet has grown, the profit outlook for 2012 increases and investors are positioned to earn additional wealth,” according to Vatalyst. The firm says Royale “is a great candidate for additional research into its production capabilities.”
Speaking of those production capabilities, in late 2011 the company announced the purchase of a 100,480-acre position in Alaska. “This acquisition has the potential of being a continuous accumulation of oil produced from shale,” Donald Hosmer, Royale’s Co-CEO, said at the time, “providing a large number of repeatable drilling opportunities that can lead to significant and extended reserve growth for Royale Energy.”
There are some forecasts calling for Royale to run to $15 a share and that could be fueled by solid production news from the company’s Alaska play. In other words, with the price dipping below $5, there is a real potential for significant upside in ROYL.
Posted by Mike Casson Executive Editor