The oil pricing scenario has improved this year on the back of lower supply and higher demand. That’s why now is a good time to take a closer look at some lesser-known oil equities that could take advantage of the improving end-market conditions. In this article, we will take a closer look at Surge Energy [stock_market_widget type="inline" template="generic" color="default" assets="SGY.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"], NuVista Energy [stock_market_widget type="inline" template="generic" color="default" assets="NVA.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"], and Jagged Peak Energy [stock_market_widget type="inline" template="generic" color="default" assets="JAG" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] to see why these three stocks stand to gain big time from an increase in oil prices.
Surge Energy is in for a Turnaround
Shares of Surge Energy have been beaten down big time in the past six months thanks to the decline in oil and natural gas prices despite the company’s solid operating performance. In fact, Surge’s revenue was up 26% last year on the back of a 21% increase in production.
The faster rate of growth in revenue as compared to production clearly indicates that the company benefited from higher oil prices last year. More specifically, Surge’s average realized oil price was up 7% during the year, while the pricing of natural gas liquids jumped 20%. Despite this, low natural gas prices last year led to a decline in the company’s operating netback.
The good part is that Surge is prepared to handle any such weakness going forward thanks to its efficient production profile. The company will deliver a 22% increase in output this year to 22,000 barrels of oil equivalent per day, while its capital expenditure will decline to the tune of 17%. The increase in the output at a lower capex will be a result of the acquisition of Mount Bastion Oil & Gas, which was completed in the fourth quarter of 2018.
Surge believes that the acquisition will have several positive effects on the company’s production and financial profile. Mount Bastion will boost Surge’s funds flow per share by 11% this year thanks to an increase in the netback, while also lowering the corporate decline rate.
In all, Surge’s favourable operating profile will prove to be a tailwind this year that should help it take advantage of an increase in oil prices.
Jagged Peak Energy Could Be a Safe Bet
Jagged Peak Energy is coming off a year where it delivered remarkable production growth. The company’s output rose 102% in 2018 to 34,200 barrels of oil equivalent per day, but it will take things slow in 2019 thanks to the hit it received from weak oil prices last year.
Jagged Peak forecasts an 8% increase in its output this year at the mid-point of its production guidance range of 36,500 to 37,900 barrels of oil equivalent per day. However, its capital expenses will decline to the tune of 12% at the mid-point of its guidance of $580 million to $630 million. The lower capital expenditure can be attributed to a 23% decline in Jagged Peak’s organic proved developed finding and drilling costs.
Jagged Peak has clarified that the company wants to keep its balance sheet in good shape this year even if the oil pricing environment takes a turn for the worse. It has designed its capital expenditure in light of a $50 oil pricing scenario, so the good news is that if the current pricing scenario continues, Jagged Peak’s funds flow from operations will be stronger than anticipated.
As such, the continued improvement in oil prices will be a tailwind for Jagged Peak this year as the company looks to keep things tight.
NuVista is Just Getting Started
NuVista Energy is already reaping the benefits of an increase in oil prices as the stock price action shows. But this is just the beginning as the company’s impressive production growth will be another catalyst going forward.
NuVista delivered production of 40,350 barrels oil equivalent per day in 2018, an increase of 35% over the prior-year period. More importantly, the company had achieved such impressive production growth with a bump of just 8% in its capital expenditure, while higher oil prices aided its financial growth.
The good part is that NuVista’s production is on track for yet another year of solid growth. The company forecasts a 30% increase in its production this year to a range of 51,000 to 54,000 barrels of oil equivalent per day. At the same time, the company’s capital expenditure is expected to come in the range of $300 million to $325 million, down from the prior-year period’s outlay of $340.8 million.
So, NuVista is another company that’s looking to grow its production efficiently in 2019, which makes it a good bet to take advantage of an increase in oil prices.
In the end, all we can say is investors need to take a closer look at these lesser-known oil stocks because they are actively managing their balance sheet by keeping costs under control and still increasing production. This puts them on track to take advantage of further increases in oil prices and will probably deliver more stock upside.
