Earnings Flow for Bakken Energy Firms

 | May 09, 2013 | 11:00 AM EDT  | Comments
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Stock quotes in this article:

wll

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clmt

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oas

As the first quarter earnings season winds down, one theme still firmly in place is the lack of revenue growth year over year. Just over 40% of S&P 500 companies reporting are beating revenue expectations even as earnings continue to come in better than expected.

The Bakken energy producers represent one market segment that has had no problem producing huge sales increases. They are delivering significant revenue growth.

The energy production expansion from the Bakken is one of the most positive developments for the economy over the past five years. It is helping to keep energy prices low, especially in the natural gas space, and this is helping our manufacturers. It is also having a substantial ripple effect on job and wage growth on the counties in and around this energy producing region.

The environment for expansion continues to improve as well. Exploration and production concerns are putting more wells in one drilling location to employ longer laterals. This increases their efficiency and lowers their costs in getting energy out of the ground.

Infrastructure also is being expanded.  Railroad lines are being extended and new pipelines are being built. Calumet Specialty Product Partners (CLMT), through a partnership, just broke ground on the first new U.S. refinery since 1976 in North Dakota. This venture is to produce the diesel fuel to supply the rigs and other drilling facilities in the region.

There are two other things which I believe can spur greater performance for these Bakken producers for the rest of the year. One is a rotation out of the defensive sectors (utilities, consumer staples, healthcare) into higher growing sectors like energy and technology that also have cheaper valuations.

I also believe the oil majors will pick up their pace of acquisitions in this region as it is a logical and cheap way to add to production and reserves.

 Here are two Bakken producers I would keep an eye on.

Oasis Petroleum (OAS) -- The last time I talked about this stock in October it was trading at $30 a share. Oasis is now at $37 but continuing to deliver results. In its earnings report this week, the company easily beat expectations on both the top and the bottom lines. It was the fifth straight quarter the company beat consensus on both earnings and sales. Revenue increased an impressive 79% year on year. Operating cash flow is up almost 800% since FY2010 closed. The stock is too cheap at under 12x 2014's projected earnings. OAS sports a minuscule five year projected PEG (.43) as well.

Whiting Petroleum (WLL) -- Another Bakken producer that beat on the top and the bottom lines when it reported results in late April. Average daily production was up 10% year on year on the barrels of oil equivalent/day basis after being up 22% year on year in the previous quarter. The company estimates it will deliver a 12% to 16% production gain for the full year. The stock is cheap at just over 4x operating cash flow. The stock trades at just under $48 a share.

JP Morgan went to "Overweight" on the equity in April and lifted its price target to $65 a share. The bank's analyst noted the change was driven by Whiting trading at significantly less than its net asset value and the equity has more potential upside if its pilot drilling programs are successful in promising new sites.

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