Warren Resources: Another $3 Energy Play With Significant Upside

Nov. 6.13 | About: Warren Resources, (WRES)

Earlier today, I published an article on a $3 energy play, Abraxas Petroleum (NASDAQ:AXAS). Abraxas is one of my favorite small cap energy concerns which just reported stellar results. I would feel remiss if I did not update my readers on another of my favorite $3 energy plays, Warren Resources (NASDAQ:WRES).

The stock is up nicely in trading today as the company delivered a substantial earnings beat. I have been long since $2 a share and the stock feels like it is poised to go significantly higher as well.

Earnings Results:

  • The company delivered EPS of 20 cents a share, versus consensus estimates of 12 cents a share.
  • Revenue came in at $34.7mm which was slightly below estimates, but up over 10% Y/Y.
  • The company produced 1.5 billion cubic feet (BCF) of natural gas in the third quarter of 2013, compared to 1.2 bcf for the third quarter of 2012. Oil production remained constant at 294,000 barrels.

Company Overview:

Warren Resources is an independent energy company engaged in oil and natural gas production. The company focuses primarily on its waterflood oil recovery programs and horizontal drilling in the Wilmington field within the Los Angeles Basin of California and on the exploration and development of coalbed methane properties located in the Rocky Mountain region. The company has just over a $235mm market capitalization and its enterprise value is slightly more than $300mm.

Four additional reasons WRES can move higher from $3 a share:

  1. This is the third straight quarter the company has beat expectations on the bottom line. Consensus earnings estimates for next year had already ticked up over the past two months. I could see estimates lifting another penny or two in the coming weeks.
  2. The company has grown operating cash flow by better than 50% since the end of FY2010. The stock is selling at less than 4x operating cash flow as well.
  3. The company is barely followed on Wall Street. Only two analysts cover the stock and they have price targets of $4 and $5.25 on the shares. As the company continues to grow production, coverage should also increase over time.
  4. The company still looks cheap looking at proven reserves which I articulated in another article. In addition, the stock trades at just over book value and 9x forward earnings; a discount to its five year average (14.6).

Disclosure: I am long WRES. 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.