The current WTI oil price of US$46 and change per barrel is not sustainable for some energy companies. However, others, including Spartan Energy Corp. (TSX:SPE) and Torc Oil and Gas Ltd. (TSX:TOG), have adapted to low energy prices. Both small-cap oil and gas producers have strong upside potential if energy prices improve.
Spartan Energy
Although Spartan Energy is a small company, it is one of the largest light oil producers in Saskatchewan. This year, it estimates it will produce 21,080 barrels of oil equivalent per day, of which about 91% is expected to be crude oil and natural gas liquids, and the remainder is expected to be natural gas.
The company aims for production-per-share growth of 10-15% per year while keeping capital spending in line with its cash flow generation. So, the stock will capture strong upside if oil prices improve.
Spartan Energy has a sustaining capital-reinvestment breakeven WTI price of about US$35 per barrel. At $6.15 per share, the company has a 12-month upside potential of 75% based on Thomson Reuters’s mean target of $10.80 per share.
Spartan Energy maintains a strong balance sheet. If it wanted to, it could pay off its net debt with its credit facility with a remainder of about $134 million. There’s also strong insider ownership with management holding about 13% of outstanding shares, which aligns management’s interest with that of shareholders.
Notably, in late June, the company had a reverse stock split. So, when you see its 52-week range of about $1.91-10.95 plastered on finance websites, beware that the range is incorrect. It should be about $5.73-10.95 instead. So, the stock is actually trading near its 52-week low.
Torc Oil and Gas
Torc Oil and Gas grows its reserves, production, and cash flow while keeping costs in mind and maintaining a monthly dividend. In fact, the company has a sustaining capital-reinvestment breakeven WTI price of about US$36 per barrel. Accounting for its dividend, the energy company requires a WTI price of about US$44 per barrel to break even.
At $5.07 per share, Torc Oil and Gas offers a yield of 4.7% and 12-month upside potential of 78% based on Thomson Reuters’s mean target of $9.04 per share. This equates to a total return of about 83% in the near term.
Interestingly enough, the Canadian Pension Plan Investment Board has invested a sizeable stake of about 12% in the company, including the dividends it has been reinvesting.
Investor takeaway
Spartan Energy and Torc Oil and Gas have strong upside potential if energy prices improve. However, shareholders should be ready for a volatile ride as the companies’ share prices are highly correlated with the price volatility of the underlying commodities.
