The natural gas futures contract is infamously known by traders as "the widow-maker." Lately, it seems as if natural gas' cousin, light sweet crude (WTI), deserves that moniker. Today, the January WTI contract whipsawed with the force that's been typical of late, jumping and then diving on rumored moves by OPEC ahead of its Thursday meeting.
I have no idea whether it's going to be a Happy Thanksgiving in Vienna, but as I had mentioned in my previous column, I just can't find evidence of a global glut in oil. So, there's a bottom somewhere, and the shrewd trader always thinks several moves ahead.
The oil price will rebound at some point, and then there will be the usual columns about "how to play the bounce." Instead of focusing on the usual suspects, however, I will discuss a few smaller companies that I follow closely. I believe these companies would be of interest to an investor looking for a mean-reversion trade. I have spoken with senior management at each of these companies within the last few weeks, and we've gone through "what happens if oil hits $70 per barrel" brainstorming work.
I must note, though, these are commodity companies. If one is going to buy stocks in them, one must take a view on the commodity first. For the sake of argument, let's assume one is optimistic on the chances for a rebound in crude prices. If that is the case, then some old favorites (I've mentioned all of them in prior columns, and all have seen stock price implosions in the recent rout) are "buyable" again.
Arabella Exploration (AXPLF)
This company didn't receive much coverage at the time, but on Sept. 4, Arabella secured $45 million of financing. This has allowed Arabella to not only continue its drilling program, but to buy additional interests in existing wells, as was indicated in their public announcement on Monday morning.
Arabella now has larger interests in very productive wells, and that cash flow will accrue to the company immediately. Arabella's prime acreage position in the Southern Delaware basin adds value, which is not currently reflected in the valuation of its thinly-traded shares.
Torchlight Energy (TRCH)
On Torchlight's earnings call Tuesday, company president John Brda noted that the company is deeply engaged in financing talks (a lead lender has been selected), and that financing "could come to a head at any moment." Torchlight needs the financing to continue its aggressive drilling program, primarily in non-operated assets.
TRCH has had several operational issues this year, and its third-quarter exit rate production of 413 boepd was well below earlier guidance. Management is still confident in the company's prospects, especially in the Hunton Limestone assets in Oklahoma, which are operated by privately-held Husky Ventures.
On the call, Mr. Brda deferred questions on current production, until the financing is announced. I have learned that financing heals most wounds in the world of E&P, and if TRCH can close this deal, I believe its production rate could easily double the third-quarter exit rate by year-end, with plenty of upside into 2015.
Victory Energy (VYEY)
Victory is most interesting now because management, led by CEO Kenny Hill, has a remit to grow acreage. Obviously, given what's happened to oil prices, this is a better time to be a buyer of West Texas acreage than it has been for a while. There are some nervous working interest owners in that part of the world, and I look for Victory to take advantage of these opportunities to add to Victory's small, current output. That output will grow organically from the small level achieved in the third quarter, as three new wells were completed in the third quarter, and two more should be completed shortly. However, it's the flexibility afforded by VYEY's unique capital structure that makes it an interesting play, as an acquirer in a buyer's market.
Management teams from all three companies will be presenting at the LD Micro Main Event conference in Los Angeles next week. I'll be there, asking the same questions as I always do. When the answers change, it's time for a trend reversal, and anyone who has looked at a chart of a small E&P company lately knows which way the opposite direction is.
