Seeing Growth in a Small Energy Name

 | Oct 31, 2012 | 1:14 PM EDT  | Comments
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It's nice to have the markets open after being closed for two days because of Hurricane Sandy. My thoughts and prayers are with my friends and colleagues who are in the midst of recovering from the devastation in the Northeast.

Now, getting back to equities: Growth is getting very hard to come by in this market right now. Only 40% of the S&P 500 companies that have reported third-quarter results have beaten sales estimates, and revenues are basically flat with those of a year ago.

One sector that is showing consistent and continuing growth is the domestic energy industry as North America rapidly expands its production capacity. I believe we are in the early stages of this development. It has the potential to alter our trade balances, give domestic manufacturers a significant global cost advantage and have geopolitical implications as well. There are myriad fast-growing firms in this space.

One that I like as an aggressive growth play is Bonanza Creek Energy (BCEI), an independent oil and natural gas company. Its primary production comes from onshore oil and natural gas assets in southern Arkansas in the mid-Continent region and in the Wattenberg field and North Park basins of the Rocky Mountain region.

Here are four additional reasons Bonanza is a good growth play at just over $23:

  • This company is a production juggernaut. It is currently experiencing production increases of over 100% year over year. Over the past five years it has grown production at an impressive 73% compound annual growth rate. It has grown reserves at a 53% CAGR over that same time period. Of its current production, 72% of its barrel of oil equivalent is higher-margin oil and liquids. Eighty-six percent of its recent revenue mix is from crude oil.
  • At the current stock price, an investor is purchasing this production and revenue growth for just 9.5x forward earnings.
  • Insiders have been net buyers of the stock in 2012, and the company has more than quadrupled operating cash flow over the past two years.
  • Bonanza has little debt for a company that is expanding production this significantly (it has a debt-to-equity ratio of 0.11), and it should throw off at least $4 a share in discretionary cash flow in fiscal 2013.

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