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3 Reasons Small-Cap Oil Stocks Should Outperform Big Oil

February 20, 2014 3:29 pm
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As detailed in many previous articles on Benzinga, investing for the long-term in oil and natural gas stocks is a wise move. But Big Oil firms like ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) are down for 2014.

In addition, the price of a barrel of oil is expected to fall about 10 percent in 2014 and then more in 2015, according to the Energy Information Agency. Here are three reasons why small cap oil firms such as Mondial Ventures (OTC: MNVND) and Clayton Williams Energy (NASDAQ: CWEI) could outperform the much larger companies in the sector.

A recent article in The Wall Street Journal reported on how Chevron, ExxonMobil, and Royal-Dutch Shell (NYSE: RDS-B) had spent $120 billion in 2013 for exploration and production activities. Despite that massive outlay, production had not increased. Due the size of Big Oil firms, large amounts of money are required to find oil and natural fields that sustain the share price. That is not the case with Mondial Ventures, which operates in the oil rich areas of Texas. It is the same for Clayton Williams Energy, which also operates in Texas, in addition to Louisiana and New Mexico. Operations are much cheaper for Clayton Williams Energy, Mondial Ventures, and other small caps.

Related: 3 Reasons Small-Cap Stocks Will Prosper From The Rise Of The Global Consumer Class

Even if a huge field is hit, it is probably not going to move the share price much of an ExxonMobil or a Royal Dutch Shell, the world's two largest oil and natural gas concerns. But a find could send the share price of Clayton Williams Energy or Mondial Ventures much higher. As small caps, it is simply a matter of size in that not nearly as much is required to send the stock price higher and higher.

That is the same with growth. ExxonMobil, Chevron, Royal Dutch Shell and others are looking at slow, steady growth. That is great for producing the cash to finance exploration, production and dividends. But it will not move the stock price higher, as the shares are fully priced. Small caps traditionally deliver much higher growth rates than larger publicly traded companies. Again, that is simply a matter of scale.

Oil companies are great investments. Due to the range of companies, an investor can load up their holdings with global concerns like ExxonMobil and Royal Dutch Shell along with entities operating primarily in Texas, such as Mondial Ventures and Clayton William Energy. The most upside certainly appears to be with small-cap firms, though.

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