Although the company’s latest quarterly report showed a sharp slowdown in revenue growth and predicted an uncertain path forward, shares of VAALCO Energy, Inc. (NYSE:EGY) could be due for short-term gains. In addition to the secular tailwind of a bull market for oil, the Houston-based oil-and-gas producer has several positive attributes.
For starters, the company has a strong return-on-assets ratio of 27 percent and well over $2 in cash per share. In fact, its total cash hoard of $136 million represents 29 percent of its total market value. Moreover, the company has no significant debt obligations and enjoys a higher operating margin than many of its competitors. As such, investors who wish to profit from the North American oil boom and pocket some short-term gains might gravitate towards this small-cap producer.
About Vaalco Energy
Vaalco Energy splits its efforts equally between the production and exploration of oil and natural gas. The company owns a wide range of small stakes in geographically-disparate properties. In addition to conventional fields in Texas and Alabama, VAALCO Energy, Inc. (NYSE:EGY) owns part of a shallow-water field in the Gulf of Mexico and a number of larger properties in two African countries. Although the company is exposed to some political risk in Gabon and Angola, this is mitigated by the more stable interests that it owns in several High Plains shale plays. Vaalco’s exploration activities are concentrated primarily in the North Sea and Africa. The company directly employs about 100 people and had an EBITDA of $160.3 million on gross revenues of $209.5 million in 2012.
Other Players and Main Competitors
Like all small energy producers, Vaalco operates in a crowded space that is dominated by larger players. In addition to like-sized competitors, the company must contend with two much-larger rivals: Hess Corp. (NYSE:HES) and Pioneer Natural Resources (NYSE:PXD). Both of these companies are heavily invested in oil and gas plays that directly compete with those owned, operated or coveted by Vaalco.
For comparison, Hess has a current market capitalization of nearly $23 billion and gross revenues of almost $38 billion. Meanwhile, Pioneer has a market cap of nearly $16 billion. Although high oil prices and a potential upswing in the price of natural gas during the coming months should provide Vaalco with the revenue that it needs to stay afloat, it must constantly mind these competitors, although right now, Vaalco’s operating margins are far above these competitors at 58%. Hess Corp. (NYSE:HES) and Pioneer Natural Resources (NYSE:PXD) have operating margins of 10.8% and 15.6%, respectively. Ultimately, the company could well end up as a takeover target.
Efficient ROA, Lots of Cash, Little Debt
Vaalco’s holdings give it much-needed exposure to the fastest-growing segment of the market for global oil production and place it in a solid position for future growth. However, the company’s immediate financial condition is also promising. Its 27 percent ROA is truly impressive for a small-cap oil producer. Meanwhile, its cash hoard is sizable by any standards. Most exciting of all, the company has no long-term debt hanging over its balance sheet. Were it not for its disappointing revenue growth, Vaalco would be a solid buy. Nevertheless, short-term investors may still have reason to look at the company at these levels.