This penny stock under 5p looks like a bargain!

UK based oil and gas company Zephyr Energy (LSE: ZPHR) has attracted positive attention in recent years. And with the share price down 27% year-on-year, this penny stock looks like a potential bargain to me at less than 5p. But what really?

Up and down

Penny stocks are one of the safer investments you can make in the stock market. I recently looked up Zephyr Energy, a British company that drills for oil and gas in the Rocky Mountains in the US. The company is only worth £72m, meaning its share price can be volatile.

This is evident from what happened a few years ago. Between June 2020 and August 2021, the company’s shares rose from 0.43p to 6.3p for a 1,300% return on investment. I wouldn’t expect either of those FTSE 100 giant to give me 13 times return in less than a year.

On the other hand, if I bought at 3.75p in June 2018, I would have licked my wounds after a heavy 88% loss when the price dropped to the 0.43p mark.

While this up and down means I will not invest too much in penny stocks, I am always on the lookout for small stocks if I can see good value.

A growing company

Zephyr Energy Inc.’s latest financial report on earnings. is 31/12/2019. Revenue of $42.9m for 2022 not only beats guidance of $35m-$40m, but is a seven-fold increase on 2021 revenue of $6m.

And most importantly, year-on-year revenue growth of more than 600% is linked to production growth of more than 500%. So I don’t see a temporary increase as oil prices rise.

At AIM-the listed company is also directed to grow again, which will be a positive sign if I decide to open a position in my own stock.

The growth will be led by six new wells that should be opened in June and the number of barrels of oil (or equivalent) is predicted to reach 1,550-1,750 per day in 2023. This figure will increase from 1,490 in 2022.

Looking at the long term, this graph from Statista shows that oil demand from OPEC countries – oil that makes up 86% of Zephyr Energy’s output – is predicted to increase significantly in the coming decade.

The long-term risk here is global demand for oil as fossil fuels run out. I don’t want to hold this type of stock if it happens sooner than expected.

I bought it?

Overall, the increase in revenue and good news on the horizon make Zephyr Energy a penny stock I will consider buying soon. However, the long-term risks with the oil and gas industry mean that I am not sure I would place the region firmly in the bargain.