Energy-sector companies have made a strong comeback in 2021, following a disastrous prior year. The XLE ETF, which tracks the energy sector, is up more than 50% year to date compared to the S&P 500’s 19.5% returns.

Rising oil prices have fueled the sector’s recovery so far this year, and this trend is likely to continue in Q4. This backdrop should afford investors an opportunity to identify players that have the potential to derive outsized gains in the future.

So, let’s compare two small-cap stocks in the oil and gas sector, Camber Energy (CEI - Get Rating) and PEDEVCO (PED - Get Rating), to see which is a better investment now.

Camber Energy is valued at a market cap of $350 million

Camber Energy is a Houston, Tex.-based independent oil and gas company with a $350 million market cap. It acquires, develops, and sells natural gas, crude oil, and natural gas liquids (NGL) in Texas. The stock has gained 37.6% in price year to date but is down 67% from its all-time high. Camber Energy is a popular stock on social media platform Reddit and has lost significant momentum in the last few trading sessions.

Camber’s shares saw an uptick after Camber Energy collaborated to help secure a license for ESG Clean Energy’s carbon-capture system. The system is patented and can leverage waste heat to capture CO2 gases that are released from combustion engines. The technology can be used in multiple industries and will be a key revenue driver for Camber Energy.

But there are multiple issues surrounding CEI. According to investment firm Kerrisdale Capital, Camber Energy is a defunct oil producer that has not filed financial statements with the SEC since Q3 of 2020, which could also lead to a delisting.

Further, Kerrisdale Capital emphasized that Camber’s only real asset is its 73% stake in Viking Energy. which is a company traded on the OTC markets. Viking Energy has a negative book value and recently dishonored the maximum-leverage covenant on one of its loans.

PEDEVCO Corp.

PEDEVCO Corp. in Houston, Tex., is an oil & gas company that acquires, develops, and produces oil and natural gas assets in the U.S. It is valued at a market cap of $149 million. Its stock is up more than 20% in price in 2021, but it still trades 37% below its 52-week high.

In the second quarter of 2021, the company’s sales rose by 470% year over year to $3.74 million, compared to just $656,000 in the prior year period. The increase in sales was attributed to favorable price variance and a favorable volume variance in Q2.

Its operating loss totaled $0.6 million, which was lower than its $3.4 million operating loss in the year-ago period. PEDEVCO’s adjusted EBITDA rose by 328% to $1.6 million in Q2, versus a $0.7 million loss in the year-ago period.

The verdict

In my view, the two companies are fundamentally weak, and investors might stand to lose a significant amount of their investment, especially if commodity prices move lower. Shares of PEDEVCO and Camber Energy can also be easily manipulated given their volatile trading volumes and popularity among retail traders.

There are several other stocks part of the energy sector that have robust balance sheets, strong economic moats, and predictable cash flows to consider currently.

CEI shares rose $0.01 (+0.73%) in after-hours trading Friday. Year-to-date, CEI has gained 48.38%, versus a 20.42% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditya Raghunath

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...

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