For investors ready to look around the corner, natural resources stocks may be entering a period defined by strong tailwinds. The current context may represent a significant long-term opportunity in the energy sector, and specifically, in small cap energy stocks.
Some of the more visible names in this group include SilverBow Resources Inc (NYSE:SBOW), Matador Resources Co (NYSE:MTDR), Diamondback Energy Inc (NASDAQ:FANG), Cimarex Energy Co (NYSE:XEC), and Hess Corporation (NYSE:HES).
However, there’s one name in the group that is significantly smaller and far less fully priced to potential, but with a very interesting mix of potential catalysts to look forward to: Camber Energy Inc (NYSEAMERICAN:CEI).
Boom – Bust – Boom
Nothing has been more out of favor over the past several years than small energy stocks. As a sector, the energies have historically made up about 9.1% of the total weight of the S&P 500. That number was 2.28% as of the close of 2020.
Generally speaking, sector weightings are mean-reverting data points. This is particularly true for commodities because lower weightings in the index reflect a lack of investor enthusiasm, which also tends to guide investments in production capacity. With oil and gas demand continuing to grow, periods of low investment in new production tend to lead shortfalls in supply, which drives raw prices higher for oil and gas, which in turn drives rekindled enthusiasm in energy stocks and raw investments.
Now, we appear to be just on the other side of the bust and potentially in the early innings of a new boom. Crude Oil prices fell to negative-forty-dollars per barrel a year ago – obviously an all-time low. Now, we are riding a major uptrend driven by expectations of huge demand to come as major economies approach herd immunity through vaccine distribution. On the other side of that process is the moment when everyone decides at the same time to take a trip and see the family or go on vacation.
That is easy to see coming. But current oil supplies will be tested when it comes because, as implied above, very little investment in new production has been made over the past year.
The result could be a further boom higher in oil prices and a sharp rekindling of interest in smaller, lighter oil and gas producers.
M&A in the Works: Camber and Viking Sittin’ in a Tree…
Camber Energy Inc (NYSEAMERICAN:CEI) is particularly interesting given its pending merger with its majority-owned subsidiary, Viking Energy Group Inc (OTCMKTS:VKIN). The strategic combination will give CEI investors strong exposure to historically rich oil and gas properties spread across Oklahoma, Texas, Louisiana, Mississippi, and Kansas, with significant exposure to the Gulf Coast.
At a time when production capacity development has not kept up with demand and the word “shortage” is starting to make its way into the energy conversation, a broad portfolio of accessible geography and reserves is a tremendous asset.
In addition, VKIN’s performance metrics continue to show tremendous promise. According to its recent filing, Viking just posted record topline performance, posting 2020 revenues above $40 million, which is up over 400% from 2018.
James Doris, President and Chief Executive Officer of both Camber and Viking, commented, “We are pleased with Viking’s results given the challenges faced in 2020. In many respects the year was about survival for E&P companies given the unprecedented price environment and market conditions, and not only did we endure thanks to the commitment and perseverance of our entire team we also managed to improve in key areas, including increasing overall revenues and reducing debt at the Viking level. We remain focused on executing on our strategy and forging a path toward profitability.”
The Definitive Agreement has already been signed for the full merger (pending vote and regulatory “ok”) and contemplates a simple one-to-one share exchange, which now appears advantageous to CEI shareholders.
Camber Energy Inc (NYSEAMERICAN:CEI) is positioned well as a small and growing player with wide exposure to production capacity growth. And it has company-specific catalysts lined up, including a very strong merger underway.
But CEI has also recently made strong strides on the balance sheet side as a collateral consequence of deepening ties in its relationship with VKIN.
Specifically, Camber Energy announced in mid-January “the completion of another deal with its majority-owned subsidiary, Viking Energy Group, Inc. (VKIN), pursuant to which Camber purchased $18.9 million worth of common stock of Viking. In exchange for the shares of Viking, Camber agreed to issue 1,890 restricted shares of Camber’s Series C Redeemable Convertible Preferred Stock to a noteholder of Viking resulting in the extinguishment of $18.9 million of debt at the Viking level. The acquisition and debt cancellation transactions, dated as of December 31, 2020, are separate from the $20.1 million transaction completed between Camber and Viking on December 23, 2020.”
James Doris, President & CEO of the two companies commented, “This transaction further strengthens the relationship between Camber and Viking and moves us one step closer toward a full combination of the two entities. Moreover, extinguishing the $18.9 million of debt improves the equity position of both companies. This is a great start to 2021.”
We would also point out that both VKIN and CEI have been active in terms of strategic activity and achieving growth by acquiring promising acreage. There’s no reason to assume this will end with the finalization of the merger.
That combined entity will have more assets to leverage in financing more M&A with more potential to become a bigger player at a time when investment capital will be searching for new names in the small-cap energy space.
As noted by Mr. Doris in the Company’s 2020 year-end letter, “As a listed NYSE (American) company (NYSE ticker symbol: CEI), our goal is to become a diversified energy company, acquiring a majority interest in, and operating, assets or entities with current revenue streams and realistic growth potential.”
Among other things, notes the letter, Camber will look to expand its E&P division through optimization of existing revenue producing assets, acquisition of interests in additional revenue producing wells, and execution of a comprehensive drilling program to increase revenue and forge a path to profitability in the near term.
It will also identify appropriate mid-stream and downstream opportunities and explore sustainable clean and renewable energy alternatives with verifiable metrics.
CEI in the Big Picture
Given the structural and secular backdrop, stocks like CEI should be heading toward favorable conditions, generically. Investors may soon be hunting for small, high-beta, interesting new items on the energy sector menu as demand from reopening begins to catch the market off balance.
Camber Energy Inc (NYSEAMERICAN:CEI) has a diversified portfolio of exposure, geographically, and has proven itself on the M&A side by finding and acquiring strong value, as evidenced by Viking’s recent record results.
There are a number of interesting catalyst in front of this stock given its size, outlook, and strategic guidance. And its recent move to pick up Viking will pay off in the form of increased cash flows, strengthened topline growth, and a larger asset base to work with in financing additional strategic growth.
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