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Sifting through the plethora of penny stocks trading in the markets to find a potential multi-bagger is an arduous task, to say the least. While former penny stock success stories such as Amazon (AMZN) and Nvidia (NVDA) are the stuff of Wall Street legend, there's also the sobering tale of Pets.com to provide a cautionary counterpoint.
Now, with interest rising around energy stocks due to forecasts for growing demand in the coming years, the “AI moment” for the power generation space seems to have arrived. For investors who don't mind the higher risk involved, there are plenty of penny stocks in the energy space that could be set for boom times in the decade ahead.
While it's still lightly covered on Wall Street, here's one Texas energy player that's on pace for serious growth in the year to come.
About Ring Energy
Based out of The Woodlands, Texas, Ring Energy (REI) focuses on conventional oil & gas production, which may be viewed as less risky than unconventional methods like fracking. The company focuses on acquiring drilling rights in the Permian Basin, a prolific oil and gas-producing region. Ring Energy's primary revenue stream comes from the sale of produced oil (CLQ24) and natural gas (NGQ24).
In August 2023, Ring closed the acquisition of the Permian assets of Founders Oil & Gas. Although the buyout was carried out with debt, it has already raised the production mix to a greater oil percentage of production.
Further, Ring Energy's focus on conventional exploration and production reduces risk compared to fracking. This translates to lower initial well decline rates, offering a potentially higher chance of early profitability through the resulting stronger cash flow in the initial years.
REI Stock Looks Cheap
With a market cap of $352.3 million, Ring Energy is a component of the small-cap benchmark Russell 2000 Index (RUT).
On a YTD basis, REI stock is up 28.7%, outperforming both the RUT and the large-cap S&P 500 Index ($SPX), which has gained 17%.
Ring Energy stock still looks undervalued at current levels, even after beating the market so far in 2024.
The penny stock is priced at 4.07x forward earnings, 0.92x sales, and 1.69x cash flow. That's a healthy discount to the energy sector medians, as well as REI's own historical valuations.
Ring's Q1 Results
In Q1, Ring Energy reported revenues of $94.5 million, up 7% year over year to beat the consensus estimate. Adjusted EPS slipped by 23.1% in the same period to $0.10, in line with expectations. Over the past 10 years, the company's revenues and EPS have expanded at CAGRs of 37.53% and 46.75%, respectively.
Net cash from operating activities increased by 3.5% from the prior year to $45.19 million during Q1, while adjusted free cash flow rose by a healthy 48% in the same period to $15.6 million. Ring is currently projected to generate $67 million in 2024 free cash flow.
Overall, the company closed the quarter with a cash balance of $1.38 million, much lower than its total debt levels of $426.37 million.
Upbeat Q2 Volume Outlook
To start this week, the energy company reported positive sales volume guidance for the second quarter, and also offered an update on its debt situation.
Specifically, Ring Energy increased its Q2 sales guidance above the high end of its previous range for both oil and total production. The company now expects oil sales of 13,500-13,700 barrels of oil per day (bo/d), exceeding the previous guidance of 13,000-13,400. Similarly, total sales are projected to be 19,500-19,700 barrels of oil equivalent per day (boe/d), up from the earlier outlook of 18,500-19,100.
In Q1, the company sold 13,394 bbl/day and 19,034 boe/d, which exceeded the high end of their respective guidance by 5% and 3%, suggesting the start of a strong demand trend.
CEO Paul McKinney added, "We also look forward to releasing our full second quarter results early next month and revised guidance for the rest of the year that reflects the outperformance during the first two quarters."
Also, Ring said it reduced debt by $15 million during Q2, bringing its total to $407 million outstanding at the end of the quarter. The company also reaffirmed the status of its $600 billion borrowing base under the terms of its $1B revolving loan facility, and said it ended Q2 with $193 million in borrowing availability.
REI is expected to release its second-quarter earnings on Aug. 1.
What Do Analysts Say About REI Stock?
REI has limited analyst coverage, with only two Wall Street experts weighing in.
Both consider Ring Energy a “Hold,” though the shared price target of $3 indicates expected upside potential of more than 59% for this overlooked penny stock.
