2 Energy Plays To Buy On Any Pullback In Oil Prices

Includes: DNR, ROSE
by: Bret Jensen

Oil began the New Year by staging a significant pullback falling some $3/barrel in the first day of trading for 2014. I would expect WTI oil prices to continue to trade in a ~$90 to ~$100/barrel range over the near term. If oil continues to pull back, I would look to take advantage of the associated E & P sector sell-off to add some additional funds to these undervalued energy names.

Denbury Resources (NYSE:DNR) develops and produces oil and natural gas from its properties in the Gulf Coast region located in Mississippi, Texas, Louisiana, and Alabama". Denbury started the year on a high note by announcing it is adding $250mm to its stock repurchase program. Late in 2013 the company said it will pay a dividend for the first time. Forward yield: 1.5%.

Another attractive attribute to owning this equity is how far under the consensus analyst price target the shares are trading at currently. DNR sells at ~$16.50 a share. The median analyst price target by the 21 analysts that cover the equity is $22 a share, implying more than 30% upside.

The company has beat bottom line expectations for four straight quarters with average beat over consensus averaging north of 15% over that time frame. The stock sells for less than five times trailing operating cash flow and just over 10% above book value.

Rosetta Resources (NASDAQ:ROSE) is a midsized (~$2.9B market capitalization) independent exploration and production company. Rosetta owns producing and non-producing oil and gas properties. It has been primarily a play on the Eagle Ford shale formation but spent ~$800mm to pick up energy producing acreage in the Permian Basin in 2013. Going forward approximately 70% of its production should come from its Eagle Ford properties.

This is another energy play that is substantially below its median analyst price target after the shares have pulled back some 25% over the past few months. The 24 analysts that cover ROSE have a $59 a share median price target on the stock. This is more than 25% above Rosetta's current share price.

The company is experiencing substantial revenue growth. Sales are tracking to post a better than 35% gain this fiscal year and analysts currently believe another ~30% increase is in the cards in FY2014. ROSE sports a minuscule five year projected PEG (.53) as well. Finally, the company has more tripled operating cash flow since the end of FY2010 and the stock sells at five times trailing operating cash flow currently.

Disclosure: I am long DNR, ROSE. 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.