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A commodity bull market is happening everywhere you look lately. While the dollar is dying, you cannot say the same about the stock prices of companies with internationally based commodities production.
The reality that the U.S. Federal Reserve will be monetizing all of the government's funding needs for at least the next year has put the market on edge. The U.S. dollar's status as a reserve currency is in question.
Investors are using this opportunity to shift their holdings towards U.S. companies with strong overseas revenue streams. And there is one such company in the oil sector that has been overlooked by mainstream investors: VAALCO Energy Inc. (NYSE: EGY).
VAALCO is a great example of a U.S.-based company that – through its operations off the coast of Africa – will profit from higher oil prices and the dollar's long-term drop in value.
This is an American company that generates most of its production from outside of the United States. It has produced oil off shore Gabon for the last decade, and it's discovered a number of nearby satellite fields that have helped the company maintain consistent production.
VAALCO currently has a four-well drilling campaign going through this year. The company also recently discovered a new pocket of oil that should be developed in 2011, giving it a new source for future production needs.
Additionally, the company owns concessions both onshore Gabon and offshore Angola where it has 40% of a 1.5 million acre Block 5. While the company has not produced these new properties, it is preparing to expand its drilling campaigns to include both of these projects along with expanding their production. This gives VAALCO three paths toward organic oil production and reserve growth.
VAALCO stock has traded sideways for the last five years, as a block of large investors was liquidated into the market. This process has kept an artificial cap on the stock price, but now the company is posited to break out to new highs.
There no longer is a significant number of underwater investors or motivated sellers, so I believe the stock is poised to make a major move up from here as the implications of the dollar settle into the market.
VAALCO just reported earnings of 22 cents per share for the third quarter with revenue growing to $32 million. The company has no debt and currently holds just under $100 million dollars in cash and equivalents. So when you buy a share in this company, you are buying a market cap that has 25% of its value in cash.
I personally love it when I can find a profitable company with no debt and a huge pile of cash. I have noticed that these types of investments usually have a high degree of internal ownership. VAALCO has stable long-term management with experience in operating off shore. They helped build this company from the ground up. It has skin in the game.
Lets do a quick review of VAALCO:
- Chairman and Chief Executive Officer Robert L. Gerry III has a large position in the company.
- The company has zero debt and over $91.2 million in cash.
- It is still developing its offshore Gabon concession.
- It is looking to develop their additional concessions.
- It has stable management.
- And the company has hit a new field to develop near their current facilities.
There are companies out there that slowly grow their assets. There are those that take high risks to get there. Then, there are those quiet, hard working companies that seem to manage their risk and still grow. Vaalco has shown that it fills that bill nicely.
The stock closed at $7.18 on Friday, down 0.28%. VAALCO gives us a great low risk vehicle at these prices.
But do so using this strategy.
Determine how large a position you wish to take in VAALCO, and immediately purchase 50% of that at the market.
For the remaining 50%, put in a "good-until-canceled" limit order to purchase VAALCO shares at $6.00, should the stock pull back to that level after its recent surge.
For more-experienced investors, there's also another option. Given that VAALCO has a very limited selection of illiquid options to consider, you might also consider buying your entire desired position at the market, after which you could write some "covered calls" on 50% of your position at a price that's 10% higher than your purchase price. The company is poised to enjoy a move up in the market, as portfolio managers look for low risk/high reward commodity stocks for their funds.
If I were still a fund manager, I would be buying companies like VAALCO for the currency protection they provide to a balanced portfolio. If the U.S. dollar continues its recent pattern of dropping, we can expect that VAALCO will be reporting higher dollar sales as crude oil rises in price again.
Those factors – as well as the gains from having an active multi-country drilling campaign in 2011-12 – gives VAALCO lots of reasons to surprise the market to the upside, which makes VAALCO shares the kind that we want to own in a long-term portfolio.
(**) Special Note of Disclosure: Jack Barnes holds no share or known exposure in VAALCO.
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