GPOR - Small-Cap Energy Producers Ranked By Quality

2023-04-02 10:08:27 ET

Summary

• Forty-nine small-cap energy producers are ranked on relative quality using a matrix with factors including, valuation, profitability, FCF, and debt.
• The quality matrix is a broad effort to identify those small-cap producers that are likely to be amongst the best and poorest investments in the group.
• Investors are once again cautioned to consider every investment carefully and on its own merits.

Author's Note : This review is a follow up to The Largest Global Energy Companies Ranked By Quality and Micro-Cap Energy Stocks Ranked By Quality wherein I reviewed world's largest and smallest energy companies using a quality matrix. I intend to complete the series by evaluating mid-cap and large cap producers in future analyses.

Background

Quick! How many small-cap energy producers can you name? Does your portfolio include a small-cap energy producer? if so, why that particular producer and how do you manage that position?

If you are like most investors, you may have read a clever well written analysis of a particular small-cap producer, perhaps years ago, and after some careful consideration you bought that stock. You have subsequently followed that stock's chart spikes and dips and perhaps nearly endless analyst coverage.

And yet, what can you say about that position, is it likely to be amongst the highest quality companies amongst its peers? The quality matrix presented below is a broad effort to answer that question by identifying those small-cap producers that are likely to be amongst the best and poorest investments in the group.

Relative Quality Evaluation

Forty-nine small-cap energy producers were evaluated using a quality matrix with factors including Price/Sales, Net Income Margin, Free Cash Flow Margin, and Total Debt/Market Cap. The values for each company's factors were normalized by means of statistical percent ranking with relation to the group. The quality matrix was calculated as the sum of the percent ranks of the factors.

Quality Matrix Chart

The above chart is sorted in descending order of the best quality (highest matrix score) to the poorest quality (lowest matrix score).

Quality Matrix Plot

The quality matrix is presented graphically in the stacked bar chart above with cumulative inputs for each factor. Based on this analysis, the best investments in the group are likely to include: Gulf Keystone Petroleum Limited ( GUKYF ), Serica Energy plc ( SQZZF ), Granite Ridge Resources, Inc. ( GRNT ), Dorchester Minerals, L.P. ( DMLP ), and Birchcliff Energy Ltd. ( BIREF ). The top pick, GUYKF, is based in Bermuda with operations in the Kurdistan Region of Iraq; and clearly would require further analysis and some risk tolerance.

The poorest small cap producers are likely to include: Tellurian Inc. ( TELL ), BW Energy Limited ( BWEFF ), Diversified Energy Company PLC ( DECPF ), Tamarack Valley Energy Ltd. ( TNEYF ), and Hammerhead Energy Inc. ( HHRS ). The lowest ranked producer is TELL; individual investors may or may not still believe in TELL's Charif Souki and his plan to build an LNG export hub.

Quality Matrix Limitations

Investors should consider the quality matrix a screen only. The matrix and its factors, normalization method, and weights could all be adjusted and yield different results. Further, the matrix is based on the most readily available and common metrics. These metrics can change rapidly with share price or as new company reports are released. It does not include company-specific data available in quarterly reports and presentations. The quality of a producer's reserves, planned Capex, expected production, and hedging are amongst the factors not addressed here. Every investment decision regarding an individual equity should be based on comprehensive analysis of that equity.

Conclusions and Recommendations

The quality matrix is a blunt instrument with perhaps little finesse or discernment. Nonetheless, a higher quality ranking indicates a small-cap producer with favorable combination of valuation, profitability, FCF and debt relative to its peers. These highly and poorly ranked producers are likely to be amongst the best and poorest investments in the group. However, the real work is left to the individual investor.

Investors are once again cautioned to consider every investment carefully and on its own merits; diamonds can quickly morph into teardrops. Broadly speaking, energy producers and particularly the small-cap producers discussed here may be particularly exposed in the event of further commodity declines or economic contraction.

Information is a source of learning. But unless it is organized, processed, and available to the right people in a format for decision making, it is a burden, not a benefit. - William Pollard (Physicist and Theologian)

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