In this article, we will take a look at the 10 best oil and gas penny stocks to buy. To see more such companies, go directly to 5 Best Oil and Gas Penny Stocks to Buy.
Oil price was inching higher on July 12 after fresh data showed that inflation is cooling, calming fears of recession. Analysts are hopeful that the worst might be behind us. This has created hopes that the global economy would not slow down as much as expected earlier. However, oil price has already suffered in 2023 amid fears of an economic slowdown and a lackluster economic activity in China. Brent oil suffered huge losses in the second quarter amid supply glut and economic slowdown fears.
Many fear that energy markets will struggle to find a direction this year. According to a Bloomberg report last month, Royal Bank of Canada analysts Michael Tran and Helima Croft said in a note that they fear “market apathy and lack of risk deployment will compound further if the global physical market does not tighten." The analysts believe that “this could end up being a lost year for the oil market as risk remains on the sidelines.”
The energy sector has always been famous for its rewarding dividends. According to a 2022 report on the energy sector by Edward Jones, the average dividend yield of the energy sector was more than double the market yield. The report said that integrating oil and gas, storage, energy transportation and marketing subsectors are offering “compelling combination” of high dividend yields and competitive dividend growth. The Edward Jones report however identified the broader shift from fossil fuels to green energy as a challenge for the oil and gas companies.
Edward Jones also gave some recommendations on investing in energy stocks. Here’s what the firm said:
“We recommend that energy stocks comprise 3% of an investor's equity portfolio. There are key differences between energy subsectors, and we encourage clients to establish a base of holdings with the larger, more diversified integrated oil & gas companies. Due to their diversified operations, integrated oil & gas companies tend to have less volatile earnings and share prices while offering attractive dividend yields well above the market average. Integrated oil & gas stocks also tend to hold up better when oil prices are falling. However, they also tend not to rise as much as other energy stocks when oil prices are rising. Stocks from the other subsectors can serve to complement integrated oil & gas stocks in a portfolio because they tend to offer more growth and perform better in a rising oil price environment. Energy stocks can be very volatile given the commodity-sensitive nature of cash flows.”
Up until May the mood in energy markets was quite somber. Many analysts who were predicting a bull run in the oil and gas markets had started to lose hope. Their hopes about China’s economic recovery were shattering. Their expectations that sanctions on Russia would cause oil price to jump were also breaking. Morgan Stanley in May 2023 abandoned its bullish outlook for the energy markets and had warned that the “prospects for second-half tightness have weakened.”
But as recession fears fade and inflation begins to slowdown in the US, some believe energy markets could breathe easier for the rest of the year. Some analysts also believe that oil prices could go higher on the back of an expected jump in economic activity in Asia in the second half that could boost demand. Similarly, the International Energy Agency also predicts that oil inventories will begin to deplete in the second half of 2023 at “a brisk clip of 2 million barrels a day,” according to Bloomberg.
However, even IEA believes that in the long term the demand for oil will decline significantly as EV investments mature and the world begins to move to clean energy sources. IEA reportedly said:
“Growth in the world’s demand for oil is set to slow almost to a halt in the coming years. The shift to a clean energy economy is picking up pace, with a peak in global oil demand in sight before the end of this decade.”
Long-Term Outlook for Oil Industry
One of the most important factors to note in the energy markets is the huge difference between short-term and long-term outlooks. For example, oil price is expected to increase until 2024 on expectations that the economic activity will increase if the world does not enter a full-blown recession. IEA also expects oil inventories to decline in the second half of 2023 even when global demand will drop to just 860,000 barrels a day, compared with 2.4 million barrels a day this year. But things will be starkly different in 2028 as IEA expects global oil demand to plateau in 2030s.
However, investments in the oil and gas space are burgeoning. Data from IEA says that the upstream spending will increase by 11% in 2023 to an 8-year high of $528 billion. IEA also says the Russia’s attack on Ukraine actually gave a boost to investments in the green energy space as countries and companies realized the importance of cutting their reliance on fossil fuels and oil imports. IEA expects the clean energy industry to see investments of about $2 trillion by 2030.
Institute of Energy Economics and Financial Analysis in its 2019 report also highlighted the importance of investing in fossil-free funds and companies in the energy sector. The report said that the traditional oil and gas sector’s “fall has been long in the making.” The report said that the oil and gas sector accounted for about 29% of the S&P 500 in 1980, and today it only accounts for about 5.3% of the index. The report also said that it’s becoming easier for fund managers to find replacements for energy stocks since “every other sector in the economy is growing faster, smarter and healthier.” But this report from 2019 didn’t age well. While the broader shift from traditional fossil fuels to green energy sources is increasing and affecting all energy companies in the world, major oil and gas companies still remain immensely relevant as well as profitable. In 2022 the energy sector was one of the top gainers. The Russian invasion of Ukraine and Europe’s struggle to meet its energy needs made traditional energy sources relevant once again.
Best Oil and Gas Penny Stocks to Buy
Photo by Zbynek Burival on Unsplash
Our Methodology
For this article, we scanned Insider Monkey’s database of 943 hedge funds and their stock holdings as of the end of the first quarter of 2023 and picked 10 oil and gas companies trading under $10 as of July 12 with the highest number of hedge fund investors.
Brooge Energy Limited (NASDAQ:BROG) provides oil storage services, heating, and blending of fuel oil and clean petroleum products. In April Brooge Energy Limited (NASDAQ:BROG) posted its 2022 results. FY Non-GAAP EPS came in at $0.31. Revenue in the period jumped 95.3% year over year to $81.54 million.
Insider Monkey’s database of 943 hedge funds shows that 7 hedge funds reported owning stakes in Brooge Energy Limited (NASDAQ:BROG) as of the end of the first quarter. The biggest stakeholder of Brooge Energy Limited (NASDAQ:BROG) was Alec Litowitz and Ross Laser’s Magnetar Capital which owns a $15 million stake in the company.
Texas-based Smart Sand, Inc. (NASDAQ:SND) engages in excavation, processing, and sale of sands in hydraulic fracturing operations in the oil and gas industry.
A total of 8 hedge funds tracked by Insider Monkey were long Smart Sand, Inc. (NASDAQ:SND) as of the end of the first quarter of 2023. The biggest hedge fund stakeholder of Smart Sand, Inc. (NASDAQ:SND) was Eric Sprott’s Sprott Asset Management which owns a $1.3 million stake in the company.
Texas-based Ring Energy Inc. (NYSE:REI) is engaged in the acquisition, exploration, development, and production of oil and natural gas in Texas and New Mexico. Ring Energy Inc. (NYSE:REI) ranks 8th in our list of the best oil and gas penny stocks according to hedge funds.
A total of 9 hedge funds in Insider Monkey’s database had stakes in Ring Energy Inc. (NYSE:REI). The biggest stakeholder of Ring Energy Inc. (NYSE:REI) during this period was John Overdeck and David Siegel’s Two Sigma Advisors which owns a $3 million stake in the company.
Texas-based Independence Contract Drilling Inc. (NYSE:ICD) offers land-based contract drilling services for oil and natural gas producers in the United States. In May, Independence Contract Drilling Inc. (NYSE:ICD)’s adjusted EPS in the period came in at $0.14 surpassing estimates by $0.28. Revenue in the quarter jumped about 82.3% year over year to $63.8 million, beating estimates by $2.21 million.
A total of 11 hedge funds tracked by Insider Monkey had stakes in Independence Contract Drilling Inc. (NYSE:ICD). The biggest hedge fund stakeholder of Independence Contract Drilling Inc. (NYSE:ICD) was Marc Lisker, Glenn Fuhrman, and John Phelan’s MSDC Management which owns a $5.5 million stake in the company
Nine Energy Service, Inc. (NYSE:NINE)'s shares have gained about 120% over the past one year through July 12. Nine Energy Service, Inc. (NYSE:NINE)’s adjusted EPS in the period came in at $0.14 beating estimates by $0.28. Revenue in the period jumped 82.3% year over year to $63.8 million, surpassing estimates by $2.21 million.
As of the end of the first quarter of 2021, 11 hedge funds in Insider Monkey’s database had stakes in this penny energy stock. The most notable stakeholder of Nine Energy Service, Inc. (NYSE:NINE) was Tontine Asset Management of Jeffrey Gendell which owns a $10 million stake in the company.
