Interested in the energy space? We think this sector is rife with opportunity. Below are six names we think are "must-own" opportunities for 2011. As always, use the list below as a starting point for your own due diligence.
Kinder Morgan, Inc. (KMI) KMI is a leading pipeline transportation and energy storage company in North America. It owns an interest in / operates more than 37,000 miles of pipelines and 180 terminals.
Its pipelines transport natural gas, gasoline, crude oil, CO2 and other products, and its terminals store petroleum products and chemicals and handle such products as ethanol, coal, petroleum coke and steel.
KMI owns the general partner interest of Kinder Morgan Energy Partners (KMP), one of the largest publicly traded pipeline limited partnerships in the U.S. Combined, the companies have an enterprise value of approximately $55 billion. KMI is trading below our fair value estimate, as is KMP.
Interested buyers should scoop up shares at these price levels or employ an at-the-money put-selling strategy to acquire shares at summer month option expirations. KMI can also offer investors some correction protection should the summer markets swoon. We think KMI offers a bit less risk than Energy Transfer Equity (ETE), which just agreed to buy out Southern Union (SUG).
ATP Oil and Gas (ATPG): The comedians at JP Morgan provided shareholders with entertainment by valuing the company at $10 per share last fall. It has since doubled in price, and then fallen back, creating a clear buying opportunity for interested investors. We think buying shortly after options expiration is the best bet given potential manipulation around options expiration as the price plummets to render certain options worthless.
2010 year-end proved reserves were 126.4 million barrels of oil equivalent with a pre-tax PV-10 value of $2.6 billion using SEC pricing as of December 31, 2010. ATP’s reserves are located 62% in the deep water Gulf of Mexico, 4% on the Gulf of Mexico shelf and 34% in the North Sea. What sets ATP Oil and Gas apart from larger independent exploration and production competitors Andarko (APC) and Apache (APA) is significant growth.
Investors in the oil and gas space have already forgotten that ATP was nearly a takeover target after General Electric (GE) took a look at buying the company last summer. A large part of the value of the company comes from its infrastructure, which-- while significant and valuable on a standalone basis-- provides a platform that many competitors in the industry are missing. This company drew in $438 million in revenues in 2010.
ATP has established a beachhead in Israel, with several drilling licenses in-hand. We expect big things from this company, led by T. Paul Buhlman. In a timely move that would have cost ATP much more just a month later, the company raised a bunch of debt just before BP's Gulf spill. It's too bad that British Petroleum (BP) has nothing close to the state-of-the art technology enjoyed by ATP. Using replacement cost method for ATP's rigs, the company's flagship rig, Titan, which is slated to be producing within the next two months, would fetch in the ballpark of $600 million alone.
As credited to Seeking Alpha contributor, George Fisher, "ATPG needs 40+ mboe per diem production to become financial viable in the long-term." We think that "long-term" will be "this year," given that Titan operations will bring 7 mboe per day. With two permits expecting approval from the BOEMRE this year, ATP should have all of the tools and permits it needs to become truly cash-flow positive in the long-run.
An additional barrel of oil production in the gulf for ATP costs next to nothing now that most major pipeline and well-head initiatives are in place. With Titan financed and other major rigs already drilling or prepped to drill, ATP has the opportunity to double in price from today's $15.69 per share. For our full valuation of ATPG, click here.
GMX Resources (GMX) is an oil and natural gas production company based out of East Texas. GMX concentrates most of its drilling in the Haynesville Shale but recently added oil exploration in the Bakken formation in North Dakota and the Niobrara formation in Wyoming to diversify its holdings.
Natural gas prices hit GMX hard at the end of 2010, causing a reported net loss of $149 million. Stocks fell as low as $4.20 on February 15 of this year, then recovered a bit and have now fallen again to $4.54.
Weaker performance than expected in late March saw many analysts downgrade the stock, but we expect GMX to improve once gas prices recover. In addition, we think that the investment community does not fully appreciate GMX's move into oil plays in the Bakken and Niobrara.
Range Resources (RRC) explores and produces natural gas in the U.S. RRC owns 2 million net acres across the U.S., including positions in the Permian Basin, Mid-Continent region, gas fields in southwestern Virginia, and 800,000 fairway acres in the Marcellus, one of the premier shale gas plays in North America. Like GMX, the biggest issue for Range in the future will be depressed gas prices.
However, Range’s position in the Marcellus, which has superior conditions for drilling and close proximity to the Northeast, gives it an edge over many of its competitors. If there is movement in the U.S. toward natural gas, don’t be surprised to see Range rocket skyward. Range currently trades at $52.
We estimate its fair value at $80 for 2012 using a 10.5% discount rate.
TransOcean (RIG) Transocean, involved in the British Petroleum oil disaster, has a market cap of $25B, and is trading on a forward P/E of 9.4. RIG is the largest offshore driller in the world, and will certainly benefit from the re-opening of drilling in the Gulf of Mexico. The firm appears to be past any financial obligations resulting from the BP disaster, and has a fairly strong balance sheet.
With oil prices rising along with instability in the Middle East, we think RIG is in a good position to rise up to pre-BP price levels. Paulson also likes the stock, as it was his biggest position at the end of the most recent reporting period. It accounted for 3.92% of his portfolio at the end of the year.
RIG made $9.57 billion in revenues in 2010, which was a decrease of 17.13%, after falling another 8.82% in 2009. The EBT margin shrunk to 13.57% in 2010, but was 33.96% in 2009. EPS fell by 69.61% to $2.99, which implies a P/E of 28.4.
Transocean is the world’s largest offshore drilling company, and we think shares are still undervalued.
SandRidge Energy (SD) This company announced on April 4 last year that it will acquire Arena Resources for $40 per share or $6.2 billion. This represented a 17% premium for Arena shareholders.This also positioned SandRidge as one of the largest producers of West Texas conventional oil and gas.
The oil opportunities will come primarily from drilling and development of shallow, low risk reservoirs located on the Central Basin Platform, a part of the Permian Basin in West Texas. The combined company will have over 200,000 net acres in the Permian Basin and 5,700 identified locations, to drill primarily in the shallow San Andres and the Clear Fork formations. Additional upside exists with down spacing and future secondary and tertiary potential.
SandRidge also owns low risk natural gas properties in the Pinon Field, and significant exploration opportunities in the West Texas Overthrust.
As for business relationships, the company has a good history with Occidental Petroleum (OXY), which processes SD's oil, liquid gases and other production at its Century Plant. The company reports that almost two-thirds of SD's Permian Basin production is crude oil, with 20% natural gas and the remainder natural gas liquids. Currently, 17 of 23 rigs are operating in the Permian, with five at Mid-Continent and one at the Overthrust (Pinon).
CEO Tom Ward, a co-founder of Chesapeake (CHK) and its COO through 2006, sold shares recently but retains a significant stake. Further, the CFO departed following losses on derivatives contracts related to oil and gas hedging.
Notably, Prem Watsa of Fairfax Financial (OTCQB:FRFHF) holds a large stake in the company. We think Occidental is interested in SD's assets and it is simply a matter of price and timing before buyout talks develop.
More recently, the company sold its Wolfberry assets in the Permian basin for $155 million on January 6, 2011. The divested properties are producing ~1,600 Boe/d, and had estimated proved reserves of 2.37 MMBoe, as of December 31, 2009. The proceeds will be used to pay down outstanding borrowings under the company's credit facility. The company is aiming to raise $600 to $800 million in additional capital by the end of 2011.
The company sold its assets in Bone Spring for $110 million on December 10, 2010. With these and the initial public offering of its royalty trust, the company expects to have raised between $500 and $550 million. Due to oil’s recent price appreciation, we believe shares of SandRidge are approaching fair value. Investors would be wise to take some money off the table at the time of writing and wait for a further pullback in oil prices before picking up shares.