3 Super-Cheap Oil & Gas Stocks to Buy for the Second Half

Energy has been one of the best-performing assets so far this year. YTD, oil is up 51%, while natural gas is up by 36%. Both have reversed all of their losses following steep declines upon the onset of the coronavirus in February and March of 2020 and are now approaching 5-year highs…

Despite these gains, we are still not seeing a meaningful supply response. CAPEX in the sector has been trending lower since 2015 and completely collapsed during Covid. This past weekend, OPEC couldn’t agree on supply increases. At the same time, demand has been quite strong despite restrictions and reduced economic activity in some parts of the world. Based on the experience of countries that are leading in vaccinations, demand will only increase as case counts drop.

Therefore, it’s likely that oil’s bull market continues, until we start to see a significant supply response. The biggest opportunity may lie in very cheap, small-cap energy stocks such as Vista Oil & Gas (VIST – Get Rating)Vaalco Energy (EGY – Get Rating), and Geopark (GPRK – Get Rating), which could have the most upside if energy prices keep trending higher.

Vista Oil & Gas (VIST)

VIST is a Mexican-based oil & gas exploration and production company that primarily operates in Latin America. The company IPO’d in July 2019 when oil was just under $60 at $11 per share. Currently, shares are trading at $3.14 which is a significant discount.

However, the company’s fundamentals are improving as it’s expected to be profitable as long as oil stays above $60 with its cost of production around $45 per barrel. In its last quarter, the company produced 34,000 barrels of oil per day which was an 11% increase from the previous quarter and a 29% increase compared to the previous year. The increase in production and rising oil price led to revenues increasing by 45%.

In the energy sector, we are seeing strength in oil and natural gas but the exploration and production companies have lagged. For example, oil is testing its 2018 highs, while the Energy Select SPDR (XLE) is off by nearly 20% from its 2018 highs. This is even more pronounced in the small-cap stocks which tend to lag their larger brethren. However, these valuation gaps are typically rectified during bull markets and often end up in overshooting as investors become too ebullient.

The POWR Ratings are consistent with this outlook as the stock is rated a B which translates to a Buy rating. B-rated stocks have posted an annual performance of 19.7% which is significantly better than the S&P 500’s annual return of 7.1%. The POWR Ratings also evaluates stocks by components. VIST has a Growth grade of B which is consistent with its impressive revenue growth and return to profitability in 2021.

To see more of VIST’s component grades, click here.

Vaalco Energy (EGY)

EGY is an oil & gas exploration and production company that is based in Houston, Texas but primarily operates off the coast of Africa. One of the reasons that I believe this bull market in energy could last longer and go further than the previous bull market in energy is that there are increased constraints to supply due to more environmental regulations. Another factor is the ESG component which is looking to influence behavior at the corporate level.

Due to these factors, I believe investors should consider E&P companies that are operating in countries with fewer environmental regulations as these deposits may be the easiest to access. Offshore drilling activity should…

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