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In the last week, I have come across two interesting tidbits concerning the oil and gas sector. First, the sector led M&A activity this year with almost $350B worth of deals in 2012, up 38% Y/Y. The second piece involved noted short seller Jim Chanos, who is targeting natural gas producers that have excessive debt. He believes they will encounter problems in the near future, as they overpaid for assets when natural gas prices were much higher. They should be increasingly challenged to service their overhanging debt. This led me to a thesis that fast-growing, small cap E and P producers with no debt could be solid performers in 2013. They should avoid the problems of their debt-laden brethren, might be able to pick up additional assets on the cheap as others try to lighten their debt load, and also could attract the attention of potential acquirers. Here are two energy producers that look to ideally positioned right now.

Sanchez Energy Corporation (NYSE:SN) is an independent exploration and production company with properties primarily in Texas, Montana and Louisiana.

Four reasons SN is a good growth play at under $18 a share:

  1. The company has approximately $145mm in net cash on the books, which equates to around 25% of its market capitalization at these price levels.
  2. The 11 analysts that cover the stock have a $27 price target on the shares, around 50% above the current stock price.
  3. Revenues are exploding. Sales should increase at better than 200% this fiscal year, and analysts believe a higher than 300% increase is in store for FY2013. Despite this revenue growth, SN is selling for under 12x forward earnings.
  4. The company turned cash flow positive last year, and has produced positive cash flow each of the last four quarters. Based on last quarter's cash flow, the next year should show at least $50mm in operating cash flow.

Emerald Oil (NYSEMKT:EOX) is another independent energy company.. The company focuses on oil and natural gas properties primarily located in Montana, North Dakota, Colorado, and Wyoming.

Four reasons EOX is solid speculative growth play at just over $5 a share:

  1. The company has a solid balance sheet with just under 15% of its current market capitalization in net cash on the books.
  2. Sales are on track to go up over 200% this fiscal year, and analysts believe another 70% revenue gain is in store for FY2013.
  3. The company is expected to lose a nickel a share in FY2012, but have a quarter per share in profits in FY2013. Consensus earnings estimates for FY2013 have tripled over the last three months.
  4. The stock is selling at just 76% of book value, and the mean price target on EOX by the seven analysts that cover the stock is north of $8 a share.
Source: 2 Small, Fast-Growing E&P Concerns That Seem Ideally Positioned In 2013