2 Small-Cap Energy Stocks on My Radar

In recent weeks, the price of oil has dropped precipitously to less than $85 per barrel. As many of us know, sharp declines in oil cause even sharper declines in many energy stocks. Oil has certainly dropped a lot and can continue to plummet, but bargains are already starting to emerge in the small-cap energy space. Patient investors willing to wait out the volatility with cash in hand can be handsomely rewarded for their efforts.

Double Eagle Petroleum (Nasdaq: DBLE  )
Double Eagle is a small exploration and production company whose main assets are in the Atlantic Rim and the Pinedale Anticline in Wyoming. For a company with such a small market cap, Double Eagle already produces very strong cash flows. It generated $25 million in operating cash flow in 2010 alone, compared to its market cap of just $94 million as of yesterday's close. That's less than four times cash flow!

What's more, this company has amassed more than 70,000 net acres in the Niobrara shale. While this company's cash flows and reserves consist mainly of natural gas, Double Eagle may add a meaningful amount of oil to its production and reserve mix as it starts to explore its Niobrara acreage.

While it's not very well-known, Double Eagle is my favorite energy holding. It may take longer to realize its value in the Niobrara, with the Eagle Ford and Bakken shale plays receiving more media attention, but there are bigger players such as Noble Energy (NYSE: NBL  ) and Carrizo Oil & Gas (Nasdaq: CRZO  ) that have made the Niobrara one of their top priorities as well. If there's value to be had in the Niobrara, Double Eagle will not be alone in reaping the benefits.

Samson Oil & Gas (AMEX: SSN  )
Next up is a small Australian-based company named Samson Oil & Gas. Thanks to a deal with Chesapeake Energy (NYSE: CHK  ) last year in which it sold just under 23,000 net acres in the Niobrara shale for $74 million, Samson is now flush with cash. It sounds funny to talk that way about a company with a net cash position of just $60 million -- that is, until you realize that Samson has a market cap of less than $200 million.

Just yesterday, Samson provided an operational update on its recently initiated four-well-drilling program. The company detailed that it had mobilized a rig to start drilling in the Niobrara shale. We can see that the company has not wasted much time putting its cash to use. It's not surprising, given that the Niobrara acreage fetched a decent price from the much bigger Chesapeake -- its acreage is obviously thought to be somewhat prospective.

What's more, Samson recently announced the closing of its purchase of more than 20,000 net acres in Roosevelt County, Mont. The acreage is thought to have Bakken potential, which would mean it's a potential hot spot for oil. Samson's not the only company making this wager, as shown by the presence of neighbors Brigham Exploration (Nasdaq: BEXP  ) to the east of Samson's acreage and Continental Resources (NYSE: CLR  ) directly to the south.

With acreage in both the Bakken and Niobrara shale formations and a war chest, Samson is ready to explore and drill on its acreage. As I mentioned earlier, its Niobrara exploratory drilling program has already started.

It's too early to tell, but success on its early wells would give Samson's share price a welcome boost. Since its success is tied to fewer wells on average than bigger players, Samson is a speculative, leveraged bet on success in these two shale plays.

Foolish bottom line
The common thread between these two companies is that they're small and they own exciting oil shale acreage that they intend to explore soon. If you thought you were late to the shale oil boom because oil prices had started running away, a second chance has emerged. Oil's recent drop has made these two stocks plunge, making them interesting again.

It's OK to wait for even better prices than have been handed to us by Mr. Market -- I'll be watching the share prices myself for potential entry points. It's never a bad thing to be choosy with entry prices. Lock in a good price and you guarantee yourself a bigger margin of safety.

Paul Chi owns shares of Chesapeake Energy and Double Eagle Petroleum. The Motley Fool owns shares of Double Eagle Petroleum. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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