What’s up guys, it’s wiz.
Welcome back to the channel. If you are new, I am a Canadian investor. I cover a whole lot of information about investing in Canada and do research into our Canadian market. I dive into growth investing, dividend investing and Canadian small caps / penny stocks. Today, I will be going over 1 Canadian small caps that is looking VERY attractive during this market. Market has been on a downwards trend, and like all stocks this penny stock has been hit, but the potential is their rebound when the market settles and starts to trend upwards, that’s when there will be big returns. For new investors, you need to join Wealthsimple Trade if you are looking to start investing and live in Canada. If you use my link in the description to join Wealthsimple, you get 2 free stocks worth up to 4500$ so do not miss out.
Let’s get into it right away. The Canadian small cap I will be going over is Gear Energy (ticker symbol GXE.TO). Gear Energy is an oil focused publicly traded exploration and production company with headquarters in Calgary. It’s an oil focused company so already, you notice a little why its a strong rebound stock and is currently holding its own in the current market, since crude oil prices have been good. To summarize,the mandate of the Gear Energy team is to grow funds from operations, production, reserves and asset value through a balanced model of exploration, development, and strategic acquisitions. So yes, that’s a pretty corporate description, but I’ll talk a little more of what they do briefly. The fundamentals of the strategy for capital investment are as follows : they balance their investment between three core areas, which we will go over, to maximize returns on capital, they have a deep inventory of future drilling opportunities (basically always keeping busy and producing / extracting value), they have a strong balance and they have low costs.
To showcase this company’s potential, I will go over their future forecast and 2022 plan. Their 55 million dollar capital budget target investments balanced between production growth, enhanced oil recovery, inventory expansion and liability reduction. The company actually recently had a budget expansion from 40 million dollars to 55 million dollars, this includes additional wells and plans to keep Gear Energy’s rigs busy through this year. The additional funds will also be dedicated to two new waterflood opportunities. For those not familiar, waterflooding is the use of water injection to increase the production from oil reservoirs. Now let’s talk about their production summary. For 2022, there is a forecast of 3% to 4% annual production growth and 7 to 8% Q1 over Q1 production growth into 2023 which looks good.
I am going to go over some company financials and also the new dividend program Gear Energy started. They actually eliminated 80 million dollars of net debt since Q1 2020. Their current forecast yields a year-end positive working capital balance of around 30 million dollars, which will be allocated to share buybacks, capital investments, cash funded acquisitions and special dividends. I spoke a bit earlier about how Gear Energy is striving for low costs, which as you can tell is paying off, because they did achieve net zero debt. As you can see from the graph, they have been delivering consistent progress in lowering costs since 2015, you also obviously see how it trends down. Forecasted for 2022 is around a 40% reduction in estimated total costs as a percentage of revenue compared to 2015. The overall low cost vision of the company was and is currently being accomplished by reducing dect and focusing production operations on low cost, high productivity horizontal oil wells. Related to financials, let’s also go over the new dividend program announced on May 4th 2022. So quarterly dividends are to be distributed equal to around 30% of the previous quarterly free funds from operations. The remaining 70% of free funds from operations is allocated to share buybacks, capital investments, cash funded acquisitions and special dividends. That is basically how their dividend program works which is good to know.
There you go, I just went over a well rounded summary of the company. Let me quickly go over what I think. We know the stock market has been bearish these past months, but stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising for Gear Energy. As a whole and with the current market, I feel that Gear Energy’s performance has been quite good. In particular, it’s great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. If we look at the year to date graph of Gear Energy it actually has pretty much held strong against the downward trend of the market. It also recently has seen a good amount of volume and a lot of growth, so among general investors, this is a great Canadian small cap. To end off, in my opinion, Gear Energy has all the ingredients for continued value growth : an exceptional balance sheet, a deep inventory of opportunities, low costs and a proven history of execution.
Hope you guys enjoyed this Canadian small cap pick. If you want to receive more Canadian small cap picks, there is a Canadian small cap email list that is available in the description. I put the emphasis on the CANADIAN aspect, these are all Canadian penny stocks that have so much potential, I hope you check that out if interested. Please watch my previous videos on Canadian stock recommendations and let me know of any Canadian stocks you want me to look into and give my opinion on. Let me know in the comments, since I really want to expand my knowledge in the Canadian market, and you also expand your own knowledge by asking questions. If you did enjoy this video, leaving a like really helps grow the channel! Thanks for watching, I’ll see you guys in the next video!