The Top Risk-Capital Sector for Speculators Right Now

Risk-Capital Investors Should  Looking MarketDespite pent-up expectations, more reasonable pricing has returned to junior energy companies.

Earnings have caught up to share prices, and while sentiment for more speculative stocks has diminished in recent months, there’s almost some value in fast-growing oil and gas producers.

Of course, institutional investors are especially fickle and will jump ship on slowing growth. But the domestic energy boom still has legs, even in the most popular basins, and it’s as good a sector as any for speculative investors to be looking.

Kodiak Oil & Gas Corp. (KOG) is a Bakken oil producer we’ve looked at a number of times in these pages. This growing energy producer operates in two Rocky Mountain basins: the Williston Basin of North Dakota and Montana, and the Green River Basin of Wyoming and Colorado.

At the company’s operation in the Williston Basin, oil is produced from multiple zones, including the Bakken shale, Mission Canyon, and Red River formations. In Wyoming, Kodiak’s asset is in the Vermillion Basin, where it targets deep, over-pressured, tight gas sands and shales.

Kodiak’s share price is about a point-and-a-half below its all-time high. It’s still a growth story and the position remains highly liquid.

The company’s 2014 first-quarter oil and gas sales soared to $257 million, up from $165 million comparatively, on 3.1 million barrels of oil sold, which represents a 57% quarter-over-quarter gain in equivalent sales volume.

Earnings were $29.1 million, or $0.11 per diluted share, up from earnings of $19.4 million, or $0.07 per diluted share.

Like many other producers operating in North Dakota and Montana, a tough winter meant a sequential quarterly decline in oil production, and management had to revise its full-year 2014 production guidance downward to between 39,000 and 42,000 barrels of oil equivalent per day (boepd). This still represents a 35%–45% gain year-over-year.

Triangle Petroleum Corporation (TPLM) is another junior growth story. Headquartered in Denver, Colorado, this producer also operates in the Williston Basin of North Dakota and Montana with other assets as well. (See “Despite Consolidation in Oil Sector, These Junior Oil & Gas Stocks Have Momentum.”)

For the fiscal year 2012, the company’s total sales were approximately $8.0 million. In the following year, they were $61.0 million, and for last fiscal year (ended January 31, 2014), total oil and gas sales were $259 million.

Wall Street’s average consensus for this fiscal year’s total sales is approximately $475 million and $630 million the following fiscal year.

The company’s growth rate is slowing, but earnings are still on the rise, and Triangle Petroleum’s current trailing price-to-earnings ratio is just over 11. I don’t see this position as unreasonably valued.

Resource investing is always high-risk, even with proven producers, and that’s because interest from institutional investors is perpetually changing. Then there’s also the underlying commodity risk itself from oil prices (in this case) as well as depletion.

But in this market, with reduced speculative fervor, I’d say domestic junior oil and gas producers offer some of the best risk-capital investment opportunities for those speculative investors who are interested.