Since my last column pointing out the vast value I saw in back-month crude futures, I wanted to try to translate that opportunity into stock ideas. I invited subscribers to email me with their thoughts using these criteria: liquids' potential over dry gas, direct investment in the "hot" plays in shale but probably excluding the Bakken (which is mostly overpriced and overhyped), and underperforming, most likely because of a less than stellar balance sheet.
Stocks that met all of these criteria would benefit marvelously from a crude barrel price that was under $90 less than two years from now but which could be hoped to be projected at closer to $110 a barrel or more as they arrived at the "spot" (current) month.
You have impressed me -- and humbled me. First, I must be very careful what I write. I see that I have an extremely engaged audience that enjoys scoping out energy ideas almost as much as I do, and your ideas come with homework and knowledge. I got some fantastic stock ideas, so many in fact that I'm going to defer my own ideas for another column and work with just a few of yours -- they're terrific.
My friend Cynthia suggests Resolute Energy (REN), a $600 million market cap company engaged in the Areth region of Utah that also holds potential acreage in the Permian basin. Resolute has had a tough time, and the chart shows its stress, having been as high as $11.50 as recently as April, only to trade under $8 for most of the summer.
Resolute had a good report from its Areth wells, and it has been able to support an $8 secondary offering, a much-needed infusion of cash. And although I have suggested that the balance sheet shouldn't need to be stellar, Resolute's is tough to like, even with good acreage, holding $600 million of debt. Continued good results from the Areth should spur the needed exploration and production into its Permian assets, but even after its secondary, it's a tough bet on cash flow. Still, if you participated on the secondary, you're up 10% -- a great result. But for the long-haul play I'm looking for, I'll pass on Resolute.
Pete suggested Approach Resources (AREX). Unfortunately, he did it about two days too late. In a great move on timing, JP Energy just announced today that it is buying all of Approach Resources' Permian assets, which is the play I most wanted if I were to concentrate on Approach for us. Before this sale, Approach was the kind of stock I would have liked -- decent balance sheet, good acreage and flat stock price for most of 2013. But since the discount is gone today (Approach is up 7% on the news), and given the Permian assets shed, we've got to go elsewhere.
Roland liked Clayton Williams Energy (CWEI), a company I'll admit I've had a bear of a time getting a handle on for years. The 81-year-old founder is a real old wildcatter, and he seems to go wherever his instincts take him, and he always has. A big part of his business now is in transport and liquids treatment and storage, including water(!). The stock has been a roller coaster, down from $120 and $100 plateaus to trade now nearer to $50. Is it a value here? Not for me. I still can't get a handle on what its core business is, but I will bless anyone who has traded this one successfully -- more power to you.
We do have one winner here, one I was going to suggest myself, but I won't take the credit, giving it to subscriber Evan: Synergy Resources (SYRG). Synergy is in the Wattenberg play with acreage that is similar to Noble Energy's (NBL), and it's a play that I love for its under-the-radar appreciation. Synergy has slowly but surely increased exposure there while retaining a stellar balance sheet with virtually zero debt. It is not entirely in liquids, retaining some dry gas acreage in Colorado, but it is quickly concentrating on their 40,000 leased acres in the Wattenberg and increasing its asset purchases there.
The strategy shows. You could have bought Synergy as low as $3 a share as recently as September 2012 and after leveling off around $7 in the summer, good reports from wells shot the stock up to over $9.
Sure, I'd like to buy it cheaper. But for the long-term play that we're looking for, Synergy should still have plenty of upside left, more than a double in my mind. I'd establish a small position here and wait for a downtick and, if I had to, buy it going up.
Synergy Resources meets all the criteria we set ¿ and it's a recommended holding.
Thanks to all of you, and thanks, Evan -- good call.