The balmy weather in NYC is disconcerting especially knowing skiing was in full swing a year ago. Even with reports both in NYC and the Mid-west of nighttime freezes approaching, it is “freaky” warm out there.
The fact is, on the consumption side of this equation, we use energy in our homes for far more than just heat, including electricity to power lights and entertainment centers, cooking and cleaning in the kitchen, use of the laundry room and bathrooms, and hundreds of other seemingly invisible needs, like powering our iPods. From that perspective, I do not see the warm weather in the Northeastern US as the most important driver of energy prices over the next 24 months.
The U.S. is the world’s largest energy consumer, but is far from being the only major industrialized country consuming vast amounts of energy, and isn't the fastest growing one. Reading the NY Times piece, I do not believe that the US will have the same mindset for conservation over the next 24 months as our friends in Japan.
I keep choosing the time frame of 24 months as it is the maximum duration a stock can be in the Clear Spin-Off Index. Below I am highlighting a constituent from the index, which my company publishes. Of course our multifactor model could kick any firm out when we rebalance the index.
I posted on 11/21/06 concerning energy supply, predicting that oil prices would surge before year end. The price of light sweet crude rose materially to end 2006 on par with the end of 2005, a year of devastating hurricanes which were credited with driving up fourth quarter energy prices. However, natural gas ended this year well below its 12/31/05 level.
Some of the multitude of reasons for energy prices to rise include proven reserves and geopolitical forces. The company I am highlighting today is an energy company. It drills and markets domestically, which at first glance appears to eliminate some of its geopolitical risks. Looking deeper, what happens in the Middle East and Central Asia directly impacts the price of some of its greatest assets, oil and gas.
Houston, Texas based Bois d'Arc Energy Inc. (BDE), is an oil and natural gas exploration company that operates out of the Gulf of Mexico. From its founding in 1997, the firm has positioned its wells offshore of Louisiana and Texas. With 43 exploration wells and 28 developmental wells by the end of 2004, BDE has amassed an overall drilling success rate of 83%. The company replaced the exploration joint venture of Comstock Resources, Inc. (CRK) and Bois d’Arc Resources, Ltd., beginning operations as an independent entity on July 2004. It then became public on May 11, 2005.
Exploring and drilling the Gulf of Mexico for just under a decade, BDE has estimated net reserves of 305.3 billion cubic feet equivalent of natural gas. The company has a business model that involves a substantial portion of capital to be allocated to exploration. They have established a certain expertise in the Gulf of Mexico region and plan on exploiting their mapping compilations and knowledge of the region for the best possible drilling locations. BDE is an active participant in the lease sales of blocks in that area, with a bidding success rate of 84%.
Last year was an off year for most oil companies operating out of the Gulf region because of hurricanes, yet 2005 was actually the highest production exit rate year (83 million cubic feet of natural gas equivalent) in the company’s history. This allowed the company to allocate a healthy $180 million to development and exploration activities for 2006. The model has helped grow its company to a market capitalization of $941.44 million with revenues of $237.28 million and growing the most recent quarter at a year over year rate of 54.20%, beating the industry average of 52.00% and crushing gulf peers Houston Exploration Co. (THX), Newfield Exploration Company (NFX) and Meridian Resource Corp. (TMR).
BDE also possesses other striking quantitative data. Over the past year, a strong gross margin of 79.89% compared to an industry average of 47.04%, and an operating margin of 42.17% compared to its peer group average of 22.99%, have resulted in significant profitability.
Other key components of this data, valuation measures, show that the company may be underpriced. BDE trades at a price to earnings (P/E) ratio of 17.07, which is above the industry average of 14.18, when considering it's above par growth and margins. To add to this, BDE has a price to book (P/B) ratio of 1.93, compared to the industry average of 2.55. Taken together, this data, as calculated by our algorithms, demonstrates that BDE is a promising spin-off stock.
Disclosure: Bois d'Arc Energy Inc. [BDE], is a constituent in the Clear Spin-Off index licensed for the Claymore/Clear Spin-Off ETF (AMEX:CSD). Mr. Corn is CEO and founder of Clear Indexes LLC which publishes the index and he owns shares of the ETF; CSD. He does not directly own shares in BDE.
BDE 1-yr chart