This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Small Stocks, Big Gains in the Oil Patch

Attention Getter

Chernoff suspects that his final pick, Vaalco, could eventually catch more attention.

Chernoff himself discovered the company while scanning the news a few months back. When Vaalco announced a new discovery, he says he "saw very large numbers for a very small company." Through further research, he learned that Vaalco owned offshore Gabon properties known for their valuable "Brent-quality" crude. He said that Gabon, located in West Africa, also offers "very favorable tax and operational policies" for international companies.

Chernoff walked away from his research impressed. But he soon turned around and jumped into the stock when it fell, he felt, without good reason.

Chernoff said investors worried when Vaalco announced that it had "temporarily abandoned" a project. But he said "the key word was 'temporarily'" because the company fully intended to resume the project after it had finished another well.

Since Chernoff bought Vaalco for around $2 a share on the OTC Bulletin Board, the stock has more than doubled and moved on to the energy-dominated Amex. It climbed 1% to $4.94 on Friday.

Chernoff expects the run to continue.

"Capex in 2005 will be for bringing on stream recent major discoveries, meaning a big increase in production and revenues," he said. And "extremely low overhead and variable costs mean that an unusually large percentage of revenue drops to the bottom line."

Jennings Capital analyst Andy Gustajtis likes one of Vaalco's partners. Pan-Ocean owns properties with Vaalco offshore but also boasts valuable onshore Gabon discoveries as well.

Gustajtis notes that Pan-Ocean has enjoyed success with both so far. Indeed, he says the company has announced an "incredible string of 17 successful drilled wells since 2000 without a single dry hole." And he marvels at that performance.

"This kind of major value creation through exploration drilling makes us ask, 'What the heck is going on?'" he wrote in late September. "Put simply, the company has unlocked a secret."

He points to new seismic technology as the weapon. And he now expects the company's earnings to triple in 2005 -- and then double again in 2006 -- as it explores its other properties.

"Our hypothesis," Gustajtis wrote, is "that Pan-Ocean holds exploration rights to a world-class reserve potential with a technical skill set that should deliver well-above average success."

Pretty Pick

Chernoff agrees that Pan-Ocean has "a lot of potential." But he doesn't buy everything that looks attractive.

Otherwise, he would already own TransGlobe Energy.

Three years ago, TransGlobe sold its U.S. oil and gas properties to focus on opportunities in energy-rich Yemen. Since then, the company has managed to increase production by 38% annually. It expects to grow production by an even greater 50% next year.

But it could be poised to really explode. Chernoff notes that TransGlobe owns a Yemen field located near some major discoveries owned by big oil companies. He says that TransGlobe also owns a large, unexplored field in Egypt that features geology similar to valuable fields located elsewhere in the Middle East.

"TransGlobe's key Yemen field, Tasour, is big and potentially huge," he said. "The upside potential, if they hit the big one, is just astronomical."

Still, Chernoff says he wants to do more homework before he places any bets on the stock.

But recent investors have already fared well. Standard & Poor's analyst Charles LaPorta recently noted that TransGlobe shares gained 33% -- 11 times more than the broader market -- last month alone. Moreover, LaPorta expects the favorable industry conditions that have lifted stocks like TransGlobe to continue.

"We believe the market's legitimate concerns on the supply side ... and the demand said ... have led to persistent elevated oil prices," he wrote. "And the lack of a foreseeable resolution should continue to allow our coverage universe to earn superior returns."

4 of 4

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,265.99 +109.14 0.64%
S&P 500 2,011.36 +9.79 0.49%
NASDAQ 4,593.4250 +31.2360 0.68%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs