Small Stocks, Big Gains in the Oil Patch
Investors are prospecting for new energy plays -- and hitting paydirt -- outside the normal discovery zones.
Granted, many people continue to pile into gushers like Apache (APA), ConocoPhillips (COP) and Valero (VLO). But some have moved on to more obscure opportunities that, thanks to bullish energy prices, suddenly look like attractive places to drill.
Even veteran producer Penn Virginia (PVA) spotted value in the likes of GMX Resources (GMXR). At one time, it seemed, GMX had dug itself into a hole so deep that it didn't seem to matter whether it was a dry one or not. As recently as last year, in fact, the cash-strapped company found itself unable to drill any new wells at all.
But high-priced natural gas caused Penn Virginia to lend a hand, and a new joint venture has brought success to both parties.The energy boom has breathed fresh life into several overlooked players, in fact. Now a company like Encore Acquisitions (EAC), which squeezes excess oil from the castoff properties of others, enjoys a little more sex appeal. Vaalco (EGY), a tiny company making big discoveries, leaps from the OTC Bulletin Board to the American Stock Exchange. And TransGlobe Energy (TGA) -- which simply boasts well-placed properties that might produce "elephants" -- starts to look like a future heavyweight. Harry Chernoff, an analyst at Pathfinder Capital Advisors, often relies on his deep industry knowledge to research more popular companies. But record energy prices have pushed him to study these less visible names -- and personally invest in most of them.
Second ChanceChernoff calls GMX his favorite pick of the lot. And at least one research house now shares his bullish view. Late last month, Hibernia Southcoast Capital became the first firm to cover the stock -- starting it at "buy" -- since the company joined forces with Penn Virginia. Before, analysts had avoided the stock for a reason. Less than a year after going public during the market drought of 2001, GMX announced a major lawsuit against Nabors Drilling (NBR) that soon disabled its exploration and production program. Only after settling that case last year did GMX finally snag a partner with the capital necessary to end the company's long dry spell. To be sure, Penn Virginia inked a lucrative deal for itself. By providing financial backing for GMX, Penn Virginia secured a major interest in some valuable GMX properties. Now, that investment is visibly paying off. When warning of lower production results last month, Penn Virginia pointed to its production program with GMX -- now accelerated and exceeding expectations -- as a bright spot for the quarter.
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