2 Small Energy Plays On Anadarko's Shopping List?

 |  Includes: APC, BCEI, CRZO
by: Bret Jensen

Anadarko Petroleum (NYSE:APC) announced today that it has sold a 10% stake in its massive offshore Mozambique gas field for $2.64B. Investors and analysts have greeted this news with enthusiasm and the stock is up in trading Monday. One item caught my eye about this announcement. It was what the company might be using these proceeds for. Anadarko "expects to invest the proceeds from the sale in its North American assets, such as the Wattenberg field, Eagle Ford, and the Permian and Powder River basins, as well as in the Gulf of Mexico."

This got me to thinking what smaller energy plays in these regions might look attractive as acquisitions for a possible use of this new capital. Here are two companies I would be looking at seriously if I was in charge of Anadarko's selection process.

Carrizo Oil & Gas (NASDAQ:CRZO) is a small ($1.4B market capitalization/$2.3B enterprise value) E&P concern with productive acreage in the Utica, Marcellus, Barnett, Niobrara and Eagle Ford shale regions. Its main focus in growing production is currently in the Eagle Ford formation in Texas. I did a "Small Cap Insight" article on this E&P concern in early July when it was trading at just over $30 a share. CRZO is up more than 10% since then, but I still like this fast growing producer.

Since my article Carrizo reported quarterly earnings that easily beat consensus expectations on both the top and the bottom line. Wunderlich also called out Carrizo as a possible play on the growing discoveries in the Wattenberg field in Colorado soon after this article was published. Finally, consensus earnings estimates for both FY2013 & FY2014 have risen quite nicely since earnings came out in early August.

CRZO is tracking to almost 35% revenue growth this fiscal year and analysts expect the company to post over 20% sales increases on the back of production gains in FY2014. The shares are not expensive given the company's growth prospects at less than 11x next fiscal year's expected earnings. Carrizo has more than tripled its operational cash flow since the end of FY2010.

Bonanza Creek Energy (NYSE:BCEI) is a small ($1.6B market capitalization/~$1.8B enterprise value) E&P concern whose main production comes from its acreage in the Wattenberg shale region in Colorado. I first spotlighted this energy play because of significant insider buying when the shares were trading at $15 a share in June 2012. The shares are now nearing $40 a share on the huge production increases the company continues to be able to drive.

Wunderlich also listed Bonanza along with Carrizo on its recent positive piece on Wattenberg plays. The company is tracking to better than 70% revenue gain this fiscal year and analysts are expecting ~40% sales increases in FY2014. The stock sports a pint-sized five year projected PEG (.56). Given the company's production increases, the stock is very reasonable at just over 14x next year's projected earnings.

Bonanza has grown its operating cash flow by around 800% since the end of FY2010. The median price target on BCEI by the twenty analysts that cover the stock is $48 a share. Bonanza also just showed up as one of noted oilman T Boone Pickens's top new holdings recently. Ipsit Mohanty, a four star analyst (according to TipRanks) at Cannacord Genuity initiated the shares as "Buy" on its attractive risk/reward profile. Mr. Mohanty has a $49 price target on the shares.

Disclosure: I am long CRZO. 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.