Two Eagle Ford Stars

Includes: CRK, ROSE, SM
by: Bret Jensen

The last few years have seen exploding domestic oil & gas production thanks to shale fracking technology. A good portion of the media attention on this development has centered around a shale region called the Bakken. The Bakken is the largest producing shale region in the United States and has rapidly made North Dakota one of the top two energy producing states in the union. The ramp up of energy output from this region has indeed been impressive and should surpass 1mm bpd in the near future. However, this technology is also unlocking noteworthy production increases in other shale regions.

One of the biggest regions where this fracking technology is being utilized is in the Eagle Ford region in Texas. The region produced over 350,000 bpd of oil in 2012 and analysts predict production will increase to over 500,000 bpd this year. The region also produces significant amounts of natural gas (NYSEMKT:NG) and natural gas liquids (NYSE:NGL). The current output already accounts for over 100,000 jobs in the region and has added billions to government coffers. Investors looking to take advantage of this huge energy boom in the region should look at some of E&P concerns that get a good portion of their production from this increasingly important energy region. Here are two I like here.

Rosetta Resources (NASDAQ:ROSE) is an independent exploration and production company. It owns producing and non-producing oil and gas properties primarily located in South Texas, including the Eagle Ford area.

4 reasons ROSE can go higher from $47 a share:

  1. The company just bought some acreage in the Permian basin from Comstock Resources (NYSE:CRK). This helps diversifies Rosetta's production base. It also adds 3,300 barrels of oil equivalent (BOE/D) to its production base (73% oil). The purchase worked out to be less than $1mm per drilling location and just over $5 per barrel of oil equivalent that the assets are believe to hold. This new acreage will add significantly to revenues going forward. Ironically, this transaction will also let Comstock increase its drilling activity in the Eagle Ford.
  2. Analysts expect over 40% revenue growth this fiscal year and close to 30% sales increases in FY2014. The stock sports a five year projected PEG of under 1 (.57).
  3. Given this projected growth, ROSE is cheap at just over 9x projected 2014's earnings.
  4. The company has more than doubled operating cash flow (OCF) in the last three years. The stock sells for less than 7x OCF.

SM Energy (NYSE:SM) is an independent oil and gas concern with exploration, development andproduction holdings in South Texas (Eagle Ford) and North Dakota (Bakken).

4 reasons SM is a good growth play at $59 a share:

  1. Approximately 60% of the company's cap-ex is targeting the Eagle Ford region (they have over 140,000 net acres there) and it expects to achieve a 50/50 ratio between liquids & natural gas production by the end of 2013, earlier than previously guidance. Obviously the recent rise in natural gas prices is positive for the company.
  2. Earnings are exploding at the company. SM made just $1.17 in FY2012 but is projected to almost doubled that in FY2013 and produce $2.14 a share in profits. Analysts have over $3 a share in earnings as a consensus in FY2014.
  3. The company is expected to grow revenues at better than a 25% CAGR over the next two years. Production grew almost 30% in 2012.
  4. The stock is cheap if you look at it on a cash flow basis. The company has almost doubled operating cash flow (OCF) over the past three years and the stock sells for around 4x current OCF.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ROSE over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.