Junior ASX oil stocks defy odds, deliver strong returns as prices climb
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In the ever-evolving landscape of the ASX, where attention often gravitates towards the glitzy allure of renewables and hydrogen, there’s a sector that’s been biding its time, quietly amassing solid profits, and giving back to shareholders.
While renewable energy sources and the hydrogen boom continue to capture headlines, a handful of junior ASX-listed oil companies are defying market expectations and turning heads.
The backdrop against which these stocks are making their remarkable comeback is the incredible surge in oil prices in 2023.
The West Texas Intermediate (WTI) crude oil benchmark has been nudging 2023 highs, witnessing a remarkable 40% increase since mid-March to hit an annual peak of nearly $US94 ($149) a barrel in late September. And while the price did come off a bit in early October, it is again on an upwards trajectory.
The rally began after OPEC production cuts in July and gained further momentum with the more recent Middle East tensions.
These oil price dynamics have significantly favoured junior producers, creating a ripe environment for profitability and growth in a sector that has largely been overlooked by mainstream investors since Aurora Energy was taken over back in 2014 for $2.6 billion.
And these under-the-radar stocks, and their investors, are reaping the rewards.
Brookside Energy, an onshore producer in Oklahoma’s prolific Anadarko Basin, is a prime example of a junior oil play that’s been making all the right moves.
With a market cap of $63m, this company boasts $28m in cash and zero debt.
In September, Brookside reported an interim net profit after tax of $15m for the first half of 2023, or $30m annualised, equating to a price-to-earnings (PE) ratio of just 1x when you exclude cash reserves, making the stock look undervalued compared to its earnings.
This situation is even more appealing when you consider that oil prices have surged 20% since the company’s last profit report.
What’s more, Brookside launched a 10% share buyback program earlier in 2023, and there are even hints of further buybacks on the horizon.
Independent Investment Research (IIR) said earlier this year the buyback was the equivalent of buying 100% of the turnover in Brookside since the start of February this year.
The company’s independent 2P reserves of 12 million barrels of oil equivalent (mostly liquids) is worth $254m, dwarfing Brookside’s enterprise value (EV) of just $35m.
The Anadarko Basin has attracted multiple majors and independents all chasing low risk unconventional hydrocarbons, particularly liquids. The Basin is currently producing 440,000 barrels of oil per day as well as plenty of natural gas.
Calima, a Canadian oil producer with a market cap of $55m, has been quietly reducing its debt while delivering strong financial results.
In September, the company reported an interim profit of $7.4m.
Calima’s strong cash flow and the $C10m ($11.5m) sale of its Montney assets in north-eastern British Columbia has resulted in the return of $10m in cash to shareholders over the past year.
The company also signalled a further $2.5m is set to be paid out in January next year.
With a market cap of $290m and a robust $US35m in net cash, Horizon Oil, a producer with operations in China and New Zealand, is making money hand over fist and rewarding shareholders.
The company reported a net profit of $US44m (~$70m) for the 2023 financial year, returning $56m to shareholders via dividends totalling 3.5c per share during the same period.
MST Access estimates that the stock is offering an impressive 29% dividend yield.
Horizon has paid out over $150m, or 9.5c per share, back to shareholders in the past three years.
While the world’s focus might be on renewables, these junior oil stocks are proving that there’s still plenty of value in the black gold.
This article was developed in collaboration with Brookside Energy, a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.