Crude has almost doubled in value from its February 2016 lows, and there are signs that it will move higher over the course of 2017. This can be attributed to the agreement between OPEC and key non-OPEC oil producers to shave roughly 1.3 million barrels daily off their collective output. That reduction has gone a long way to rebalancing global oil markets, which have been caught in a prolonged supply glut since late 2014.
As a result, analysts are predicting that crude could rise to as high as US$70 per barrel by the end of the year. This bodes well for beaten-down energy stocks with many poised to boost investments in exploration and development as prices rise.
Here are three great names trading for under $5 per share that hold tremendous potential in the positive operating environment that is emerging.
Now what?
One of my long-time favourites is Colombian-based oil producer and explorer Gran Tierra Energy Inc. (TSX: GTE)(NYSE:GTE). Its pristine balance sheet and the completion of a transformational acquisition, which saw oil reserves grow by 91% and 2016 production expand by 18% year over year, highlights the considerable potential the company possesses.
The transaction also significantly boosted Gran Tierra’s acreage in Colombia, boosting its exploration upside and the efficiencies that are available with much of that acreage collocated with existing landholdings.
Gran Tierra is attractively priced with it trading at $3.25 per share, or less than half of the $6.77 per share value ascribed to its oil reserves.
Another tantalizingly priced oil stock is Colombia-focused oil and gas producer Canacol Energy Ltd. (TSX: CNE). It is currently trading at $3.75, which is about two-and-a-half times lower than the value of its oil reserves which were calculated to be worth $9.44 per share.
Canacol is well positioned to grow earnings over the course of 2017. Gas production is expected to grow significantly during the year because Canacol is in the process of bringing three new Colombian gas wells online, and it has two more wells in the process of being drilled.
Gas sales are also set to grow. In late 2016, Canacol established four new take-or-pay gas sales contracts on Colombia’s Caribbean coast for 100 million cubic feet of natural gas. It also initiated a project to develop a new gas pipeline in late 2016, which will transport up to 40 million cubic feet of gas daily from its gas fields to Colombia’s Caribbean coast.
For these reasons, I expect Canacol to experience a healthy bump in earnings over the course of the year which will help to push its share price higher.
Finally, there is Surge Energy Inc. (TSX: SGY) one of the few remaining Canadian upstream oil producers still paying a dividend despite the prolonged slump in crude.
Surge is also attractively priced relative to the independently calculated value of its oil reserves. It is currently trading for $2.84 per share, or 1.6 times lower than the net asset value of its reserves of $4.79 per share. This, along with its dividend, growing production, and high-quality, low-decline-rate oil reserves, indicates that it offers investors considerable upside.
Earnings and margins should also grow over the course of 2017. Surge remains focused on reducing operating expenses, which, by the end of the third quarter 2016, had dropped by 16% compared to a year earlier and are projected to fall further in 2017.
Furthermore, daily oil production is projected to grow by up to 7% during 2017 when compared to 2016, and this will boost Surge’s bottom line, which should cause its shares to appreciate.
So what?
None of these are low-risk energy investments. They are all heavily exposed to movements in the price of crude, operational risks, and the potential for unexpected outages and cost blowouts.
Nonetheless, they are all attractively priced relative to the value of their oil reserves. As the price of crude appreciates over the course of 2017, their earnings should grow because all three are focused on reducing expenses and boosting production.
