Approach Resources Inc. (NASDAQ:AREX) was one of the first companies to drill into the rich Permian Basin, which has become a focal point for the industry since early 2012 given its high oil content. Approach Resources Inc. (NASDAQ:AREX) accumulated 145,000 net acres in the basin that are essentially contiguous. It’s basically a start-up company, but the possibilities are enormous.
Trading at 2013 and 2014 P/E of 68x and 32x, respectively, Approach Resources Inc. (NASDAQ:AREX) is a bet on the successful development of the Permian Basin. Besides, founding should not be a concern. I expect the company to issue $300 million in debt in order to pay down the outstanding $152 million under its credit facility and fully fund the drilling program of the next two years. This would bring the company’s net debt/capital to a very comfortable 32% versus the peer’s average of 40%.
The shale oil/gas revolution is here and many small capitalization companies such as the three named above are playing a key role. I expect huge M&A activity in the sector in the coming years as many of this small companies own a big portion of the most valuable territories for shale development.
The article Three Small-Cap Oil Companies for Your Watch List originally appeared on Fool.com and is written by Federico Zaldua.
Federico Zaldua has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Federico is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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