Small Cap Oil Stocks

Small cap oil stocks refer to junior companies actively exploring for oil and gas, ramping up production of oil and gas or both. A definition of a small cap stock is a company with a market value of between $250 million to $3 billion. Investing in these small cap energy companies are not for the novice investor. Given the nature of the energy business, there are many obstacles for the company to overcome. Failure rates for these upstart companies are high but owning the right small cap oil stock can generate enormous returns.

Because these young companies are not yet fully set up in terms of production, they are extremely sensitive to changes in energy prices. In a high price energy environment, these stocks usually appreciate more than senior energy producers. In a low price energy setting, the bigger, the shares of the more established energy producers hold their levels better due to greater stability. These senior companies have strong finances and are able to ride out the low commodity-pricing environment.

Why Invest In A Small Cap Oil Stock
Despite the risks, investing in these young energy companies attracts many investors. Compared to a large cap energy company, a small cap provides a much superior growth story. A junior energy company can conceivably ramp up production at an exponential rate, generating handsome returns to the shareholder. To improve the odds of hitting the gusher, the investor needs to diligently evaluate the company. The better informed the investor, the more likelihood of picking the winner. Here are some points to consider when studying a potential small cap oil stock:

The Management Team
Vital to the success of a small cap energy company is its management team. Running an energy exploration and production companies requires people with business and technical experience. Bringing the company forward from its exploratory stage to production stage is a challenging process filled with many obstacles. The ideal person is someone who has experience in starting up and growing an energy producing company.

The Jurisdiction The Company Operates In
The greatest potential for significant oil and gas discoveries are found in jurisdictions outside developed nations. Promise for major discoveries tend to be located in either politically unstable countries and countries whose governments do not always abide by the original agreement. For energy companies operating in these nations, issues include the ability to repatriate profits, risks of their operations being expropriated, terrorist attacks and the safety of their employees. If the company operates in a country where human rights abuses are well documented, management could find it difficult to attract investors given the sensitive issue.

The Finances
Sufficient funds must be on hand to sufficiently cover exploration activity and the ramping up of production. The business of finding and producing energy requires massive amounts of capital. Even before the first barrel of oil is produced, exploration rights must be secured, specialized equipment must be purchased or rented and staff needs to be paid. The exploratory process could take years before a significant energy deposit is found. A company that has good relations with the investment community is viewed upon favorably. If they need to issue more shares to finance their oil and gas activities, willing buyers are available.

Conventional Or Unconventional Methods
Even if a major discovery is found, the question is whether the oil or gas can be extracted at a reasonable cost. If it is easily accessible using proven conventional methods, chances are the energy fine is commercially viable. The technology and production techniques are proven to be reliable. If the deposit requires unconventional methods to get the oil or gas, the project might not be economically feasible. The reason is the technology to extract the energy has not been sufficiently developed. Deploying this method could lead to significant costs overruns and delays in the project. Companies in this situation might either wait until the technology is further developed or seek a partner with the relevant expertise and finances. The decision rests on the company’s long-term forecast for the price of oil and gas.

Growing Production And Reserves
The reason investors get excited about a small cap oil stock is its ability to aggressively grow oil and gas production and reserves. In addition to producing the commodity, investors want to see the company successfully explore for new deposits. The oil and gas company is deemed promising as long as it can successfully replace production with new reserves at an economical price. Energy producing companies cannot control the prices it sells its products at. The oil or gas market dictates what price the company can get. The factors that are within the company’s control are their production costs and the level of reserves built up.