Ever since the bull market began almost exactly 13 years ago to the day following the collapse of the financial and housing markets, small-cap stocks have been almost as responsible as tech stocks for the gains investors enjoyed.
Where the Dow Jones Industrial Average jumped 420% and the S&P 500 gained 550% in that time frame, the S&P 600 small-cap index powered ahead to return 615% for investors.
That same dynamic has played out in the energy sector over the past year, as small-cap oil and gas players are handily outperforming industry majors like ExxonMobil and Chevron.
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With West Texas Intermediate priced at around $110 a barrel and Brent crude going for over $116 a barrel at the time of writing, there's a good chance the little guys will continue to be sources for superior returns in the energy sector, so sticking with stocks in the S&P 600 can be a smart choice.
Unlike the Russell 2000, the targeted small-cap index has qualitative criteria to be included on the list, such as certain liquidity requirements and a demand for profitability, making these three energy stocks a good bet to buy during a market downturn.
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1. RPC
So far in 2022, oil field services and equipment provider RPC (RES -0.13%) has been the best-performing stock on the S&P 600, rising 124% as increasing revenue and earnings were born of the elevated pricing environment. There's good reason to believe this will continue.
The number of oil and gas rigs in operation remains historically low. While they're above the all-time lows hit back during the throes of the pandemic, they've been marching higher since, and the number in operation has more than doubled between August 2020 and January 2022. And higher prices for oil and gas should spur even more oil field activity.
Pressure pumping, which accounts for 43% of revenue, is an important component of the early stages of accessing fossil fuels, while downhole tubing, another 29% of revenue, is vital at the completion stage of a well. More drilling activity should lead to even greater revenue and profitability.
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2. Nabors Industries
Nabors Industries (NBR -0.69%) falls right behind RPC in terms of performance this year, returning gains of 94%, as day rates on its contract drill rigs improved by as much as $4,000 per day toward the end of the fourth quarter.
As one of the world's largest drilling contractors, Nabors has been especially impacted by the collapse in the number of rigs in operation. Even with the start to the recovery in demand, it reported a net loss of $114 million, or $14.60 per share, though that was better than the $15.79 per share loss reported in the prior quarter.
Nabors ended the fourth quarter with 75 rigs in operation, up 11%, and it expects growth to continue at double-digit rates in the first quarter. Mid-single-digit increases for daily drilling margins are also anticipated.
Along with rising demand in international markets, Nabors Industries looks ready for continued improvements as the oil and gas industry maintains a growing and healthier profile for profitability.
Image source: Helmerich & Payne.
3. Helmerich & Payne
Like Nabors, Helmerich & Payne (HP -1.74%) is a drill rig contractor that bills itself as the largest in the western hemisphere, with a significant presence in most of the U.S. shale and unconventional basins, such as the Permian and Eagle Ford basins. Also, like its rival, H&P was hit hard by the decline in activity as utilization rates dropped from 67% in 2019 down to 43% last year.
At the end of its fiscal first quarter in January, however, utilization had surged to around 70%. President and CEO John Lindsay says rig supply is tightening, so he's expecting there to be strong pricing power moving forward.
Of these three companies, Helmerich & Payne is the only one that pays a dividend, which is currently yielding 2.4% annually. It's also buying back its stock, spending $60 million in the first quarter and another $16 million so far in the second.
With shares up 66% year to date, the market has priced in a lot of the good news into its shares, but because there's no sign of a letup in the higher pricing environment, Helmerich & Payne should continue to benefit from producers taking advantage of the situation, both here and around the world.
