The Best Small-Cap Oil Stock I've Ever Seen

Personally, I'm long-term bullish on the price of oil -- and because I'm bullish, I'm interested in companies that control massive deposits of crude.

I like to compare an investment in companies sitting on large stores of oil to owning land that lies beyond city limits. That land might not be worth much today -- but once the city's expanding borders reach that land, it could be worth a fortune.

Similarly, rising oil prices and technological advances in oil recovery are like the city borders moving to where my land is. Higher prices and improving technology make recovering more of the oil that producers are sitting on economically feasible.

However, I wouldn't invest in a producer solely because it has a big accumulation of oil in the ground. The company also has to be inexpensively priced relative to the value of its proven reserves and cash flow.

Now, I've turned over quite a few rocks over the past couple of years looking for undervalued opportunities in the oil sector. I don't know that I've come across many companies -- if any -- that trade at as large a discount to proven reserves and have the balance sheet that the little-known company I'd like to tell you about today does.

Bankers Petroleum ( BNKJF ) is a Canadian oil producer that operates exclusively in Albania -- which isn't exactly Canada, but it certainly isn't Iraq either. What attracted Bankers Petroleum to Albania was its reasonably stable operating environment... and a unique opportunity: Bankers controls the Patos-Marinza oilfield, the single largest onshore oilfield in Europe, with an estimated 5.4 billion barrels of oil.

Bankers has 232 million barrels of proved and probable reserves valued at $2.2 billion. That works out to $9.72 a share -- more than 50% above the current price around $6.25.

I've seen a few highly leveraged companies that trade at big discounts to their reserves. But these companies generally are one short-term commodity price downturn or one operational hiccup away from having an equity value of zero.

I don't see that sort of downside risk in Bankers, not with its recent cash flow:

Bankers' enterprise value of $1.6 billion equates to a cash flow multiple of 5.5 on 2014's expected cash flow. That's quite attractive for a company whose cash flow is growing at an annual rate of 15% to 30%.

So Bankers is attractively priced relative to its reserves and cash flow -- but what excites me about this company is the upside from improving the percentage of the Patos-Marinza field's 5.4 billion barrels of oil that can be recovered.

Bankers' 232 million barrels of proved and probable reserves amount to only 4.3% of the original oil in place. Improving the recovery factor by just 1% would mean an additional 54 million barrels of reserves, a 25% increase for Bankers.

The answer lies in the implementation of secondary recovery methods such as water and polymer flooding. In water flooding, water is injected into a reservoir to increase pressures and force more oil out. A polymer flood involves injecting a gel into the water to make it thicker and push even more oil out.

Bankers cites the example of heavy oil secondary recovery success stories such as Cenovus Energy (NYSE: CVE ) on its Pelican heavy-oil field, which has gone from a recovery rate of 10% under primary drilling to almost 20% with waterflooding.

Without any success with these secondary recovery efforts, Bankers Petroleum is an attractively valued stock -- but any success could position it for big gains.

Risks to Consider: The primary risks for Bankers lie in oil prices and the country risk involved with operating in Albania.

Action to Take --> Buy shares of Bankers Petroleum for the attractive valuation and steady, predictable growth -- with added upside from improved recovery rates.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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