Who Will Eagle Ford Reward?

 | Apr 02, 2012 | 11:30 AM EDT  | Comments
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This is the inaugural column by Bret Jensen, was chief investment strategist for Simplified Asset Management from 2008-11. Jensen has nearly 20 years of experience in the financial services industry.

North American natural gas and oil production have been on a tear over the last few years despite a difficult economic environment. One of the fastest-growing energy producing areas in the United States is occurring around the Eagle Ford shale deposit in Texas.

Production from this region rose sevenfold in 2011 and Sanford Bernstein predicts this region could produce 1.2 million barrels of oil equivalent (MMBOE) a day by 2015. The region has several advantages for energy producers:

  1. A well can be completed in several weeks rather than five months offshore.
  2. The cost per well (roughly $5.5 million) is less than it is in the Bakken ($8 million).
  3. Given its proximity to refineries and pipeline capacity, Eagle Ford oil/gas provides higher margins than that produced in the Bakken as well.
  4. Texas provides a more stable investment environment than most international projects.

Independent exploration and production company Rosetta Resources (ROSE), which has exposure to Eagle Ford, is undervalued at under $49 a share.

  • The stock is significantly below consensus price targets. The median price target for the 21 analysts that cover Rosetta is $60 a share.
  • It is expected to have exponential EPS growth.  Rosetta made $1.91 a share in FY2011 and analysts have it earning $3.69 a share in FY2012 and $5.60 in FY2013.
  • The stock has a low five-year projected PEG (0.69) and sells for under 9x forward earnings, which is cheap for a stock for growing so quickly.\Consensus earnings estimates have increased for FY2012 and FY2013 over the last three months. It is also projected to increase revenues near 50% in FY2012 and nearly 40%. Given its relatively small market capitalization (just over $2.5 billino), rapidly rising production and desirable acreage, I would not be surprised to see Rosetta attract the attention of a larger player at some point in the future.

EOG Resources (EOG) is a good long-term play at around $110 a share.

  • It's one of the biggest players in the Eagle Ford with 1.6 billion barrels of oil equivalent (BOE) of reserves in the area. The company has done a great job of growing oil production throughout its portfolio of acreage.  It grew oil production 35% in FY2010, 52% in FY2011 and the company projects 30% production growth in FY2012.
  • Despite the drop in natural gas prices, consensus earnings estimates for both FY2012 and FY2013 have gone up significantly over the past two months. The company expects 84% of its 2012 production to be oil and liquids, with just 16% coming from natural gas.
  • The stock is selling in the bottom third of its five-year valuation range based on P/CF, P/S and P/B. S&P has an A- credit rating, a Buy recommendation and a $135 price target on EOG.
  • EOG Resources has a very low five-year projected PEG (.37) and shows considerable projected earnings growth as well. The company made $3.79 a share in FY2011. Consensus earnings estimates are for $5.17 a share in FY2012 and $6.91 in FY2013. The company has easily beat quarterly earnings estimates over the last year as the investment community has been slow to appreciate EOG's earnings power.

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