A Mid-Cap Driller in the Right Place

I have to give a shout-out to Jim Cramer for consistently and frequently reminding viewers and investors about the huge energy production growth coming from the Eagle Ford and Permian basins in Texas. The domestic energy boom has been a consistent bright spot throughout five years of an anemic postwar recovery. Cramer's advocacy of the Pickens plan and for approval of the Keystone pipeline and other common-sense energy policies could accelerate the country's march toward energy independence. I also believe that putting in place programs to more effectively harness our increasing energy bounty would substantially boost job and economic growth closer to the 4% to 5% GDP annual increases we have seen in previous postwar recoveries. Unfortunately, given the ideology of the current administration, a push to put these policies into action has as much chance as the Chicago Cubs winning the World Series this year. Of course, an investor can still take advantage of the increasing energy production that is happening despite the lack of a coherent federal energy policy. Typical of the myriad attractive exploration-and-production concerns riding the production boom in Texas is Rosetta Resources (ROSE). Rosetta Resources is a midsized (about $2.9 billion market capitalization) independent E&P company. Rosetta owns producing and non-producing oil and gas properties. It has been primarily a play on the Eagle Ford shale formation, but the company spent about $800 million to pick up energy-producing acreage in the Permian Basin in 2013. It now gets two thirds of production from its Eagle Ford properties and a quarter of production from the Permian. The company has sold off non-core assets over the past years. Rosetta has used the proceeds to purchase additional acreage in its core drilling areas in the Permian and the Eagle Ford. As can be seen from the chart below, the company is almost a pure-play bet now on production coming from the dynamic and oil-rich Eagle Ford and Permian. Rosetta's Production, 2009-2014 Rosetta Resources View Chart » The company has roughly doubled production over the past four years while consolidating around its focus areas. Obviously, there are significant economies of scale in concentrating on only two core regions. In addition, the company should benefit as infrastructure -- pipelines, storage facilities and gas-processing capability -- gets built in these regions and it can capture more profit per barrel of oil produced. About 70% of Rosetta's production is in oil and liquids. Although most of the Rosetta's production is hedged, it should continue to benefit from oil staying above $100 a barrel and from natural gas prices hovering near four-year highs as these hedges roll over. Rosetta should continue to increase production in the 15% to 20% range annually for many years, given its deep inventory of drilling sites. The stock is selling at under 14x trailing earnings, and the shares sport a five-year projected price/earnings-to-growth ratio of under 1 (at 0.64). The equity is offering a nice entry point right now for long-term investors, as it is down some 25% from its highs late last year before it delivered a disappointing earnings report. Rosetta is hardly the only attractive play in the Permian and Eagle Ford basins. Cramer has highlighted Permian play EOG Resources (EOG) several times over the past month, and Dan Dicker is a just a fountain of information about good plays in energy throughout the country, including those focusing on the Permian and Eagle Ford.

A Mid-Cap Driller in the Right Place

Rosetta Resources is almost a pure play on the Eagle Ford and Permian shales.

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