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5 Best Small-Cap Energy Stocks Up 10% Since OPEC's Decision

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In a bold but not unexpected move, the OPEC cartel agreed on November 30 to reduce production starting next month. Seen as a desperate bid to put a floor on falling oil prices, the group – led by Saudi Arabia – promised to take 1.2 million barrels a day out of the market.

OPEC’s First Output Cut in 8 Years

OPEC's decision to cut oil production was not totally surprising though the magnitude of reduction were deeper than many analysts had expected. The move aims to trim output to 32.5 million barrels per day -- at the low end of a preliminary agreement struck in September.

Crude prices, which reached $110 per barrel in mid-2014, fell to a 12-year low of $26.21 in Feb on a supply glut amid slowing demand. In particular, the oil rout alarmed many of the countries whose economies depend on the commodity’s exports.

A sop to populous big-spending oil producers such as Venezuela and Iran, the cartel’s cutbacks was a mild loss for Saudi Arabia that has been adamant about its continuing strategy to preserve market share by pumping oil almost flat-out rather than trying to prop up prices by modifying production limits.

Riyadh was forced to soften its stand after it became clear that the kingdom was getting clobbered by its own policies. As a result, the world’s largest crude exporter gave its seal of approval on the cartel’s production cut decision – the first such attempt since 2008. What’s more, Saudi Arabia will bear the lion’s share of the production cuts to accommodate arch rivals Iran’s demands.

Riyadh, OPEC's largest supplier of oil, will trim volumes by nearly a half a million barrels per day, while allowing Iran to boost production slightly. Another fast-growing producer Iraq surprised pundits by pledging to curtail output by 0.2 million barrels per day.

Gets Russia to Comply

Russia, which is not part of the body that pumps a third of the world’s oil, will also join output cuts for the first time in 15 years. The biggest supplier outside the bloc relented from its longstanding position of only freezing production and agreed to cut 300,000 barrels from its record high output of more than 10 million barrels a day.

Oil Prices & Stocks Surge

The landmark OPEC deal had a massive impact on the energy markets, sending crude prices back above $50 a barrel. While the entire sector is roaring higher since the announcement, the independent oil explorers and producers – whose revenues are directly associated with crude price – have been among the best performing stocks. In fact, shares of oil finders like Whiting Petroleum Corp. (), Oasis Petroleum Inc. and Marathon Oil Corp. (MRO - Free Report) have exploded higher and climbed to new multi-month highs.

An Opportunity to Build a Position in Energy

While high inventories and robust production could still push the commodity to the low 40s, signs are emerging that oil prices are likely to stabilize and gradually pick up. Apart from a complete collapse of the agreement, there’s not many catalysts to reverse the impetus.

In fact, most market observers see oil’s post-OPEC rally as the beginning of a sustained increase in prices. The cut by OPEC is expected reduce global output and help the oil market come into balance, thereby supporting the commodity to break out from the 2½ year slump.

For investors willing to bet on the revival of crude prices, this is the perfect time to build or increase their position in oil-related companies. However, selecting stocks to buy could be a tricky proposition, especially with oil prices moving like a roller-coaster. 

The Zacks Methodology

With the help of our Zacks Stock Screener, one can locate stocks with green shoots. In particular, we have shortlisted 5 companies that have gone up an impressive 10% or more since the OPEC announcement, and have a Zacks Rank #1 (Strong Buy) or #2 (Buy). A favorable Zacks Rank indicates that these stocks have been witnessing positive estimate revisions, which generally translate into rapid price appreciation. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Small-Cap Advantage

To magnify our returns, we have opted for small-cap stocks. Owing to their significant growth potential, small-cap stocks (stocks with a market cap of around $1 billion or below) usually tend to outperform their large-cap peers over time. However, these can also be riskier than well-known large-cap companies. Nonetheless, the growth potential of small-caps is tempting, especially given the current economic backdrop of continued strength in the U.S. dollar and oil price unpredictability.

5 Stocks to Invest In

Ocean Rig UDW LLC : Nicosia, Cyprus-headquartered Ocean Rig mainly provides services related to offshore drilling to the upstream energy players. The company’s drilling units specialize in operating in harsh-environment.

Zacks Rank: #1

Market Cap: $299.25 million

% Price Change (1 Week): +23.18%

W&T Offshore Inc. (WTI - Free Report) : An exploration and production company headquartered in Houston, TX, W&T Offshore focuses primarily in U.S. Gulf of Mexico’s shallow water shelf.

Zacks Rank: #2

Market Cap: $287.87 million

% Price Change (1 Week): +31.25%

Sanchez Energy Corp. (SN - Free Report) : Sanchez Energy is another Houston, TX-based independent exploration and production company with a primary focus on the Eagle Ford Shale in South Texas.

Zacks Rank: #2

Market Cap: $601.67 million

% Price Change (1 Week): +25.83%

Parker Drilling Co. : Also headquartered in Houston, TX, Parker Drilling is a supplier of contract drilling, and drilling-related services and rental tools to the worldwide energy industry.

Zacks Rank: #2

Market Cap: $300.13 million

% Price Change (1 Week): +14.29%

Resolute Energy Corp. : Denver, CO-based Resolute Energy is an independent oil and gas finder in the U.S. with primary focus on its core Utah and Wyoming properties.

Zacks Rank: #2

Market Cap: $579.53 million

% Price Change (1 Week): +13.48%

Bottom Line

To sum it up, these market-beating money minters that are scaling newer heights still appear to have plenty of runway left.

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