2 high-risk, high-reward small caps I’d buy before March

Paul Summers thinks now might be a great time to buy into these small-cap stocks.

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The ability of small companies to generate superior returns for investors over the long term is widely known. Trouble is, investing lower down the market spectrum also involves taking on significantly more capital risk. While this is particularly true with businesses operating in the oil and gas sector, here are two companies I think might be worth buying before next month.

Listen up

With resources in Morocco and Italy and a market cap of £623m, upstream gas company Sound Energy (LSE: SOU) isn’t exactly a market minnow. 

Immensely popular with retail investors, shares in the Sevenoaks-based company have more than five-bagged over the last 12 months and now trade at almost 93p thanks to a series of positive updates.

Back in January, the company announced that its TE-7 well at Tendrara had yielded almost 1bn cubic feet of gas over a 56-day period, despite flow being constrained to “preserve completion integrity“. This result allowed the company to confirm that a “significant connected volume” of gas was present at the site. On the same day, Sound announced that — among other acquisitions — it had agreed to purchase a further 20% interest in Tendrara, bringing its total holding of the asset to 75%.    

This month, Sound moves on to drill a new well, TE-8, with the hope that it will confirm that an even larger reservoir exists. If successful, the chances of the company selling this asset for a huge profit over the next couple of years increase substantially. With highly-rated CEO James Parsons already hinting at a “liquidity event” on the horizon, those investing now could see substantial returns over only a short period of time. 

World class assets?

At £638m, fractured basement oil play Hurricane Energy (LSE: HUR) has an almost identical market capitalisation to that of Sound Energy. Like its industry peer, Hurricane also enjoyed a superb 2016 with its share price rising five-fold following plenty of good news relating to its 100%-owned assets in the West of Shetland. I think there could be more to come. 

Earlier this month, Hurricane released the results of further technical analysis at its Lancaster well with resources now believed to be considerably more than first thought. Investors will be hoping for further clarification by the end of Q1 when details from an independent technical report are released to the market. 

Elsewhere, resources at Lincoln — a separate hydrocarbon accumulation from the field at Lancaster — are now believed to be part of a vast basement feature that also includes the company’s undrilled Warwick prospect. If this can be confirmed after further testing, the company could have a second huge field on its hands.

It could get even better for Hurricane. In addition to the above, the firm is also currently engaged in drilling its Halifax asset. With results again expected by the end of Q1, both management and investors will be looking for clues that point to a single accumulation of oil between this well and Lancaster. If this turns out to be the case, Hurricane’s assets would quickly be re-labelled ‘world class’.  

With the possibility of a farm-out agreement with an oil major looking more and more likely, the next few weeks look set to be a highly exciting time for the company.  

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers owns shares in Hurricane Energy. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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