3 Small-Cap Energy Stocks Analysts Expect to Rally

Energy prices are kicking off another volatile week, with December crude futures (CLZ23) on the decline after their latest test of the $90 level. Traders are eyeing an apparent easing of tensions in the Middle East, while sector giant Chevron (CVX) is tumbling on news of a $53 billion deal to acquire Hess (HES) - marking the latest mega-merger after Exxon Mobil's (XOM) deal to scoop up Pioneer (PXD).

Against this backdrop, it's not a bad time to consider some top-rated small-cap energy stocks - companies that analysts think have plenty of upside, and are looking ripe to buy after recent pullbacks. With this in mind, here are some of smaller players in the oil and gas space to consider buying on the dip.

Precision Drilling

We kick off our list with the largest drilling rig contractor in Canada, Precision Drilling (PDS). It also provides well servicing, and production services to the upstream oil and gas industry. Founded in 1951, the company operates a fleet of over 225 drilling rigs. Its market cap currently stands at $819.6 million.

Precision Drilling stock is down 21.7% on a YTD basis.

Precision Drilling's results for the second quarter were marked by growth in both revenue and earnings, as demand for drilling remained strong despite a first-half fall in global commodity prices. Revenues rose by 30.6% from the previous year to $316.89 million, aided by a rise in contract drilling rig fleet and drilling rig utilization days. The company reported adjusted EPS of $1.21 - much improved from a loss of $1.42 per share in the year-ago period, and better than the consensus estimate of $0.99. In fact, the company's EPS has missed expectations just once over the past five quarters.

Looking ahead, PDS is set to report its next quarterly results on Oct. 26.

Notably, considering the company operates in a capital-intensive industry, Precision Drilling's long-term debt of $717 million appears manageable. In fact, this debt load has declined from the start of the year.

Further, Precision has solid revenue visibility, thanks in part to 10 newly secured long-term contracts in its Contract Drilling Services (CDS) segment. More broadly, demand for its services is expected to remain strong, as the global onshore drilling market is well-positioned to reach $8.3 billion by 2033.

Taking all of this into account, analysts have assigned a “Strong Buy” rating on the stock, with a mean target price of $92.87. This indicates an upside potential of roughly 55% from current levels. Out of 10 analysts covering the stock, 9 have a “Strong Buy” rating and 1 has a “Moderate Buy” rating.

Helix Energy

Moving along, our next focus stock is offshore energy services company Helix Energy (HLX). With a focus on deepwater and ultra-deepwater markets, Helix's services include well intervention, subsea construction, and decommissioning. 

Founded in 1980 and based out of Texas, Helix has a fleet of over 20 vessels and employs over 2,000 people. The company currently commands a market cap of $1.56 billion.

Shares of Helix Energy have rallied more than 38% in 2023 so far to outpace the broader markets, but HLX has pulled back nearly 14% from its September highs.

Helix's Q2 results were strong, as revenues almost doubled year-over-year and the company swung to a quarterly profit. Revenues of $308.8 million were up 89% from the prior year, bolstered by the company's core well intervention and robotics segments helped matters. Adjusted EPS of $0.11 beat the consensus estimate, and compared favorably to the previous year's loss of $0.20 per share. Helix has matched or beaten analysts' bottom-line estimates on only one occasion over the past five quarters.

Further, the company also raised its guidance for 2023, with revenues expected to range between $1.12-$1.23 billion (vs. $1-1.02 billion expected earlier). Helixexpects the demand for its services to remain solid through the next year amid a combination of higher margin contracts and substantially lower regulatory survey requirements, as stated in its latest earnings call.

Notably, although Helix generated positive free cash flows of $30.2 million in the quarter on a non-GAAP basis (compared to an outflow of $7.4 million in Q2 2022), net debt simultaneously increased to $78.3 million from about $4 million.

As a heads-up, HLX is due to report its upcoming quarterly results in just a few hours, after tonight's closing bell.

Overall, analysts remain optimistic about the stock, with an average “Moderate Buy” rating and a mean target price of $13.50. This denotes an upside potential of roughly 32% from current levels. Out of four analysts covering the stock, 3 have a “Strong Buy” rating and 1 has a “Moderate Sell” rating.

Atlas Energy

We conclude our list with Atlas Energy (AESI), a leader in the proppant and proppant logistics industry - a key material used in fracking. The company is currently solely focused on serving customers in the Permian Basin of West Texas and New Mexico, the most active oil and natural gas-producing regions in North America. 

As the leading supplier of proppants, or treated sand, for the oil and gas industry in the Permian Basin, Atlas is well-positioned to benefit as oil majors like Exxon invest in the resource-rich region. Another sign of robust demand is the company's decision to expand its trucking fleet from 66 as of Q2 to 120 by year-end. In terms of its Kermit Plant, the company expects to have a higher firm-wide capacity by the end of Q3 and into Q4.

AESI's market cap currently stands at $2 billion, and the company offers shareholders a dividend yield of 2.5%.

Atlas Energy stock is up 13% on a YTD basis, but the shares have retreated about 24% from their recent highs near $25.

For the latest quarter, Atlas Energy reported revenues of $161.8 million, up 5.5% from the previous year as steady growth in service sales offset a decline in core product sales. Plus, adjusted EPS of $0.69 topped analysts' expectations. Growth in free cash flows (+6.4% YoY), cash from operating activities (+91.5% YoY), and a reduction in long-term debt from the start of the year are also worth noting.

Currently, we're just about a week away from AESI's next quarterly earnings report, slated for Oct. 30.

Analysts have assigned a consensus “Strong Buy” rating to AESI, with a mean target price of $25.11. This denotes an upside potential of about 27% from current levels. Out of 10 analysts covering the stock, 9 have a “Strong Buy” rating and 1 has a “Moderate Buy” rating.