Don't Overlook These Eagle Ford Plays

 | Feb 14, 2013 | 10:30 AM EST
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Jim Cramer recently wrote a solid column about myriad Bakken energy producers that could make good takeout targets as their assets are undervalued. I have written about many of the same companies over the last nine months, and I own Hess (HES) and Linn Energy (LINE).

 that were mentioned in the article. Given the low financing costs currently available in the credit markets, a pickup in acquisitions in the region makes a lot of sense. In addition, there are some synergies in tying fields in the same resource base together. Finally, the majors are late to the shale party and in a lot of cases, it is easier, faster and cheaper to buy production and reserves on Wall Street than developing your own fields. The Bakken is the most visible of the current shale regions. Production has increased some 500% during the last five or six years. It now stands at more than half a million barrels per day and continues to rise at an impressive rate.

However, new fracking technology is also unlocking oil and gas in many other shale regions throughout the country. One region I particularly like is the Eagle Ford in Texas. It is very similar to the Bakken in that it is has pro-growth state government, improving energy infrastructure (pipelines, storage, etc.) and rapidly growing production. Here are two companies from that region that offer some of the same long-term value as the Bakken producers.

Rosetta Resources (ROSE) is an independent exploration and production company. It owns producing and non-producing oil and gas properties located primarily in South Texas, including the Eagle Ford, and in the Southern Alberta Basin in Northwest Montana.

Four reasons ROSE is a solid growth play at $50 a share:

  1. Revenue growth projections call for an over 35% sales increase in fiscal 2013, in line with revenue growth in fiscal 2012. The stock sports a five year projected PEG of under 1 (.87).
  2. Rosetta has some of the best acreage in the liquids-rich Eagle Ford region. Production is on track to increase 30% from this area in fiscal 2013. The company will likely derive more than 60% of overall production from oil and liquids in fiscal 2013 vs. approximately 45% in fiscal 2011.
  3. Given the company's growth prospects, the stock sells at a very reasonable 12x forward earnings.
  4. Consensus earnings estimates for fiscal 2013 have moved up over the last three months. The company has more than doubled operating cash flow over the past three years.

Swift Energy (SPY) has operating oil and natural gas properties in Texas, as well as onshore and in the inland waters of Louisiana.

Four reasons SFY has upside from just over $15 a share:

  1. Revenue and earnings should rebound in fiscal 2013 after both being down in 2012. The stock sells for less than 11x forward earnings and analysts expect approximately 20% revenue growth this year.
  2. The stock is cheap, trading at 66% of book value, and its enterprise value over operating cash flow ratio comes in around 4. It is just starting to really develop its Eagle Ford properties (78,000 net acres).
  3. The 12 analysts that cover the stock have a median price target of $25 a share on the stock, around 80% above the current stock price. Credit Suisse expects almost $3.50 in EPS for fiscal 2014.
  4. Consensus earnings estimates for fiscal 2013 have risen in the last month and insiders have been net buyers of the shares over the last nine months. Most of those insider purchases were at higher prices than the current stock level.

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