Shares of Canadian oil and gas producer Gran Tierra Energy (NYSEMKT:GTE) are up 17.5% as of 11:30 a.m. EDT today. The surge in price comes after the company posted first-quarter results that showed promise for the small-cap stock.
Before you get too excited about that 17% gain, it’s worth pointing out that Gran Tierra has a market capitalization of $290 million. Even by small-cap standards, this is a small company that is going to see wild swings in share price regardless of the news. In the past year, the stock has traded from 25% below to 240% above its year-ago share price. A significant news event may not even be necessary to cause a double-digit swing for this company.
Today’s rally comes after the company released earnings that showed markedly improving results. While much of those gains were from higher realized oil prices, there were also some noticeable improvements in operating and transportation costs.
It wasn’t enough to turn a net profit, but these results led management to increase its guidance for the year. It now expects to generate $75 million in free cash flow for the year compared to previous estimates of $25 million. Not much, but remember the size of the company.
I can’t stress enough that this is a small company and that its profitability is determined largely by oil prices. Management tries to mitigate some of that risk by purchasing futures contracts to ensure a certain price, but futures contracts can sometimes only do so much.
There are some reasons to think that oil prices are set to rise, but so many possibilities could lead to another price decline that it’s unwise to make a large bet one way or another. Kudos to Gran Tierra’s management for making some improvements to its cost structure, but that’s not really enough to make it a surefire buy today.
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