A Pair of E&P Plays

 | Sep 20, 2012 | 11:00 AM EDT
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The market has not given investors with cash on the sidelines many opportunities to buy on the dips over the past three months, as stocks have rallied almost immediately off any pullback.  Oil prices had their biggest drop in two months on Wednesday, and oil-related stocks had significant selloffs, continuing weakness in the sector over the past few trading sessions. The long-term environment remains positive for the oil sector given the reflationary measures of the Federal Reserve, which could easily overshoot and ignite inflation.  In addition, any measures that might depress the price of oil, such as the release of strategic reserves or the recently announced moves by Saudi Arabia, are likely to be temporary and should cease shortly after the election. I believe the current pullback provides a decent opportunity to put cash to work in some exploration-and-production names with reasonable valuations and great growth prospects.  Here are two companies that I like at current levels.

Gulfport Energy (GPOR) has oil- and natural gas-producing properties in the Louisiana Gulf Coast, in west Texas in the Permian Basin, and in west Colorado in the Niobrara Formation. It is also active in Alberta, Thailand and the Utica Shale.

Four reasons GPOR is undervalued at $30 a share:

  • The stock was upgraded to Buy earlier in week by Global Hunter Securities (an analyst firm I respect in the oil and oil services sector) and given a $42 price target.  Credit Suisse also has an Outperform rating and the same price target.
  • The company is on track to book better-than-expected revenue growth north of 20% in 2012, and analysts expect more than a 30% sales increase in 2013.
  • Although exploration in its Utica shale properties is in the early stages, initial results are encouraging.  The company is ramping up production judiciously.
  • The company has consistently raised production from around 1600 barrels of oil equivalent per day in 2005 to an estimated 8200 BOE/D in 2012.  It has also slowly raised the oil & liquids portion of production, which now stands at approximately 95%.

Kodiak Oil & Gas (KOG) is an E&P company whose main oil and natural gas reserves and operations are primarily concentrated in the Williston Basin of North Dakota and Montana, and the Green River Basin of Wyoming and Colorado.

Four reasons KOG is solid growth play at around $9 a share:

  • Production and revenue are exploding at this mid-cap E&P concern.  The company is on track to quadruple sales year over year to more than $460 million in 2012.  Analysts expect more than $800 million in revenue for 2013.
  • Very few E&P firms have grown production as much as Kodiak. It produced around 600 BOE/D in 2009.  In its latest quarter, it was producing more than 12,500 BOE/D.
  • This production is flowing through to the bottom line.  Kodiak has grown its operating cash flow by a factor of 12 in the last three years.
  • Given its market capitalization of just over $3 billion and its valuable acreage, I would not be shocked to see KOG as a buyout candidate. In addition, the continued build out of pipelines in key shale regions over the coming years should have positive impacts on Kodiak's margins.

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