The last few years have not been pleasant for the oil industry. When the economy is weak, consumers and manufacturers spend less, which drives demand for oil way down. In 2008, the average price of a barrel of oil was about $91. When the economy tanked in 2009, this fell to $53 a barrel. As a result, revenues and share prices across the oil industry took a big hit. You can clearly see this impact on the share price of VAALCO Energy, Inc. (NYSE: EGY), a small cap oil company. Prior to the market crash in 2008, VAALCO was trading near $9 a share. Post-crash, VAALCO’s share price fell by over 50 percent and stayed in this range for years. Now that the economy is coming back to life, there is more demand for oil. EGY has benefited from this trend and its share price is back to $8, having recovered nearly all its market losses.
This stock still has a lot of upside potential. First of all, the global economy is far from being in a complete recovery. As the United States and Europe move towards rising employment numbers, the price of oil should continue to go up. This will give VAALCO Energy another boost in revenues. VAALCO has also been expanding its drilling operations. Last November, the company opened two new wells in Africa and plans to open five more in the near future. The company expects these new wells to increase its daily oil production by about 20 percent, just in time for higher oil prices. It would be impossible for oil giants like Exxon Mobil Corporation (NYSE: XOM) and Chevron Corporation (NYSE: CVX) to get a similar increase in oil production. They’re already producing so much oil that new wells would only make a marginal difference. With a small company like VAALCO, each new well means much more production and therefore much more revenue
VAALCO also has a very high operating margin of 58 percent. This means that more production should lead to a large increase in profits. Since it is so expensive to search for and produce oil, the oil industry, on average, has a negative operating margin. This shows what a great job the company is doing managing expenses. But what if the economy tanks again? After all, most of Europe is still in a recession and the American recovery is shaky at best. VAALCO seems to be hoarding cash as protection against another downturn. The company currently has over $136 million in cash reserves and holds no debt. Close competitors like the Hess Corporation (NYSE: HES) and Pioneer Natural Resources Co. (NYSE: PXD) are in much rockier shape. These companies currently have billions worth of debt compared to a few million in cash reserves. Another recession would cause serious problems for other oil companies, but probably not for VAALCO.
VAALCO is currently trading at $8.04 a share. Analysts are bullish on this company and give this stock a price target of $9.00. If the company hits this price target, that’s already a double digit return. With its current financial strength and scheduled growth for the future, this stock has the potential to do even better.