Just a little less than a year and a half ago, West Texas Intermediate (WTI) crude oil futures made history by trading in negative territory. At that point in time, it would have been hard to imagine that in less than 2 years that oil would be trading at multi-year highs.
In fact, oil is now trading at its highest levels since 2014. Equally impressive, the record inventory gluts have been completely worked through, and we are at inventory levels that are below historical averages. Demand is already back to pre-pandemic levels, and there is another looming catalyst for demand as travel remains below pre-pandemic levels and could return to previous levels if/when the virus situation continues to improve.
From the supply side, CAPEX remains low despite higher prices and has been low for the last few years. This means that oil is likely in the early stages of a multi year bull market. This week’s featured stock under $10 – TransGlobe Energy (TGA) – is well-positioned to benefit from these trends.
TGA is an oil and gas explorer and producer that operates in Egypt and Canada. In its last quarter, the company produced about 13,000 barrels of oil per day, resulting in a positive cash flow of $17 million and net earnings of $11 million.
This is quite impressive given the company’s market cap is $156 million. Another aspect to like about TGA is that the bulk of its operations are in Egypt, where there are fewer environmental regulations. Over the last decade, the cost of producing oil in North America has significantly risen due to a tight labor market and increasing environmental regulations.
Oil’s Bull Market
The major catalyst for TGA is the bull market in oil. It’s remarkable that oil is now substantially higher than it was prior to the pandemic. And, there are some good reasons for it to keep going higher.
The main factor is companies have been focused on preserving cash given that oil has trended lower for the bulk of the past decade. This is a sharp contrast to the 2008 to 2011 period when CAPEX exploded as many believed that oil was going to permanently stay above $100. Ironically, most of these projects have failed to generate significant returns with a significant swathe of energy-issued credit going bust or downgraded.
Today is a much different environment. Despite the more than 100% rise in oil prices, CAPEX remains depressed. Additionally, many institutions are unwilling to invest in energy securities due to ESG guidelines.
On the demand side, the pandemic revealed that the world remains reliant on oil. And, demand will only increase as the travel volumes are once again picking up as coronavirus case counts decline.
Longer-term, demand will increase as an estimated 1 billion more people will enter the global middle class over the next decade. This will result in more cars on the road, refrigerators in the kitchen, and air-conditioners. This additional energy consumption will likely offset increases in energy efficiency.
The upside case for TGA is quite obvious given the company’s impressive fundamentals and the fundamentals driving oil higher. However, the stock is even more attractive when considering its valuation.
Currently, TGA has a forward P/E of 8.6. This is significantly cheaper than the S&P 500’s forward P/E of 22. Another important valuation metric is free cash flow, especially for energy companies. Unlike earnings or revenue which can be gamed, free cash flow is a much more tangible figure. Here, TGA also shines with a P/FCF of 5.2. This means that at current oil prices, TGA is generating just under 20% of its market cap in cash.
Given this attractive picture, it’s not surprising that TGA is rated an A by the POWR Ratings which translates to a Strong Buy. A-rated stocks have posted an average annual performance of 30.7% which compares favorably to the S&P 500’s 7.1% annual gain.
The POWR Ratings are calculated by weighing 118 different factors, each with its own weight. It also evaluates stocks according to different components to give investors additional insight. TGA has strong grades across the board including an A for Momentum and a B for Growth. To see more of TGA’s POWR Ratings, click here.
Putting It All Together
TGA is a high-quality, small-cap energy producer that offers a rare combination of growth and value. The last time that oil prices were above $70 in 2018, TGA was trading around $4 which implies 100% upside. Finally, the bull market in oil is likely in its early innings given that demand and supply dynamics remain supportive.
TGA is just one of 8 stocks in my portfolio. That’s where I combine my many years of investing experience with the Top 10 Growth Stocks strategy, which has +62.9% annual returns, to bring investors the best growth stocks for today’s market.
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TGA shares were unchanged in premarket trading Thursday. Year-to-date, TGA has gained 110.11%, versus a 17.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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