2 Energy Stocks That Could Blow the Lights Out in 2018

With oil trading at $65 today, 50% higher than a year ago, I think it’s a good idea to not only look at the larger energy stocks that will be beneficiaries, but also at the lesser-known, smaller names.

The smaller, higher-growth producers are, by their very nature, less diversified with less financial flexibility and are riskier, which translates into greater upside potential.

Well, this may be the time to dip our toes into this space. As oil rises, these companies will have more upside potential, on average, than the bigger names.

Seven Generations Energy Ltd. (TSX:VII)

In 2016, the stock rose 125%, but in 2017 it fell 43%, as production actually came in below expectations and costs rose to levels that were higher than expected, thereby eroding the economics of the play.

So, where are we today?

Well, because of this setback, the stock now trades at a discount to its peers, but the bullish thesis remains.

The company’s assets are in the prolific Montney area, which boasts superior economics, and with 25 years of inventory, Seven Generations is in it for the long haul and has many years of low-risk drilling ahead of it.

Management owns roughly 9% of shares outstanding, and this number is much higher if we include all employees of the company. This serves to gives us comfort, knowing that their interests are aligned with shareholders’ interests.

In the latest quarter, the third quarter of 2017, production increased 11% and cash flow per share increased 5%.

For 2018, the company has guided toward 17% production growth. After missing guidance in 2016 and suffering the consequences of that, management will likely be giving more conservative guidance, so this number will be highly achievable.

Raging River Exploration Inc. (TSX:RRX)

Raging River has more than 90% of its production weighted towards oil.

The company’s management team is experienced with a good track record and owns roughly 10% of shares outstanding. So, management is aligned with the results of the firm, which is a definite plus.

The company has a strong balance sheet to take it through its growth program, and with its 3,500-location drilling inventory, this company has good upside as oil prices recover.

Netbacks are high, and the company’s drilling inventory is predictable, giving it a favourable risk/reward profile.

In summary, as oil stays at these levels for a longer time, investors will have more confidence that this oil rally is for real, and companies will increasingly be reporting better-than-expected results, thereby driving the stocks higher.

And on average, the smaller oil and gas stocks have more upside that the bigger ones.

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Fool contributor Karen Thomas has no position in any of the stocks mentioned.

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