Big Potential for Eagle Ford Shale Leaseholders to Profit

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 |  Includes: APC, FST, HK, NFX, PXD, SM
by: David White

The Eagle Ford shale was originally seen as a natural gas play, but it is now seen as one of the largest oilfields ever discovered in the U.S. It lies at a depth of between 2500 feet at the edge of the hill country to over 15,000 feet deep in the flatlands. It is more than 40 miles wide and four hundred miles long. The oil play is over 330 feet thick in some areas. Some think there could be 10B barrels of recoverable oil in the Eagle Ford.

The Eagle Ford is also a huge natural gas and NGL’s play. Good sized leaseholders in this prolific play should benefit greatly. A few of these are Petrohawk (NYSE:HK) -- 368,000 net acres, Newfield Exploration Co. (NYSE:NFX) -- 335,000 net acres, Pioneer Natural Resources (NYSE:PXD) -- 310,000 net acres, Anadarko Petroleum Corp. (NYSE:APC) -- 280,000 net acres, and SM Energy (NYSE:SM) -- 250.000 net acres (SM has plans to sell 20%-30% of this), and smaller Forest Oil (NYSE:FST) -- 109,000 net acres. The E.U.R.’s (Expected Ultimate Recovery) for an oil well in the Eagle Ford Shale varies from about 200Mboe to about 600Mboe. The production rates vary from 300boe/day to about 1500boe/day. In other words, the Eagle Ford Shale is a very profitable field. All of the above companies should profit greatly from their involvement in the field.

It is a little early in the development cycle to cite exact production numbers, etc. Right now you have to go with the various company estimates. If the company is not too short of cash, those estimates often turn out to be significantly underestimated (not hyped). The fundamental financial information about these companies should give us an approximate idea of how each expects to do (and how honest we might expect each company to be about its prospects). The data are in the table below. The data come from TDameritrade and Yahoo Finance. 

Stock

HK

NFX

PXD

APC

SM

FST

Price

$22.42

$66.63

$87.14

$74.77

$66.69

$25.61

1yr. Analysts’ Price Target

$32.08

$85.55

$118.14

$91.83

$76.75

$39.56

PE

234.81

34.08

14.62

142.69

82.54

25.31

FPE

14.36

10.75

16.69

17.51

19.16

10.37

Avg. Analysts’ Recommendation

2.0

2.1

1.9

2.1

2.1

2.0

This Year EPS Growth Estimate

111.10%

8.60%

106.20%

80.30%

51.80%

-3.60%

Next Year EPS Growth Estimate

78.90%

26.50%

43.00%

30.20%

67.30%

54.40%

5yr EPS Growth Estimate per annum

25.60%

10.80%

8.50%

18.23%

26.73%

15.00%

EPS misses in the last 4 quarters

3

2

1

1

1

3

Avg. EPS beat % in the last 4 quarters

-11.225%

0.00%

+12.925%

+19.30%

+31.925%

-16.05%

Stock Price Appreciation % YTD

+30.66%

-8.46%

-1.40%

-2.43%

+10.56%

-33.36%

Price/Book

2.09

2.69

2.27

1.78

3.5

2.13

Price/Cash Flow

12.5

9.69

13.41

9.19

10.20

7.62

Beta

0.56

1.47

1.75

1.46

1.40

1.36

Short Interest as a % of Float

4.04%

2.70%

6.81%

1.23%

5.16%

3.19%

Cash per Share

$0.01

$0.42

$4.46

$6.96

$3.01

$1.56

Market Cap

$7.42B

$8.81B

$10.17B

$37.20B

$4.24B

$2.85B

Enterprise Value

$10.41B

$11.18B

$11.97B

$47.00B

$4.54B

$4.55B

% Held by Institutions

84.80%

98.98%

88.40%

85.42%

91.63%

98.43%

Total Debt/Total Capital (mrq)

45.69%

42.18%

36.01%

37.72%

34.12%

57.80%

Quick Ratio (mrq)

--

0.66

1.51

1.6

--

0.51

Interest Coverage (mrq)

0.55

0.87

0.59

2.17

0.7

0.96

Return on Equity (ttm)

2.26%

8.25%

3.72%

1.30%

4.45%

8.75%

EPS Growth (mrq)

-99.24%

-100.97%

-130.46%

-69.94%

-114.88%

-103.10%

EPS Growth (ttm)

-42.32%

-34.31%

93.26%

-70.44%

-54.91%

-67.12%

Revenue Growth (mrq)

12.32%

19.00%

4.07%

3.63%

-12.44%

-8.44%

Revenue Growth (ttm)

32.67%

28.42%

81.02%

7.30%

5.33%

5.10%

Annual Dividend Rate

--

--

$0.08

$0.36

$0.10

--

Gross Profit Margin (ttm)

61.96%

82.13%

72.81%

84.37%

78.46%

76.74%

Operating Profit Margin (ttm)

10.07%

31.32%

10.82%

15.16%

10.60%

35.65%

Net Profit Margin (ttm)

4.82%

13.30%

7.56%

2.97%

4.98%

13.76%

Click to enlarge

The above data look good in some ways, but not good in others. The APC data look best, but come with a gotcha. APC, which owns a 25% interest in the Macondo well, may face an uncertain amount of liability for last summer‘s spill, although APC denies any responsibility. Plus APC has significant interests in the Gulf of Mexico. The development of some of these has been hindered by the moratorium on drilling (and the slower permitting process now that the moratorium is over). I should mention that APC has made three new discoveries in the Gulf of Mexico this year. Plus it has a recent big discovery off the coast of Ghana. These might factor into your decision about this stock.

The Interest Coverage and Quick Ratio data indicate that HK, NFX, and SM could have trouble paying their bills. SM is in the process of selling 20%-30% of its Eagle Ford Shale acreage (250,000 acres). After this is done, its ability to cover expenses in the near term should be much improved. FST is on the borderline of whether it can pay its bills or not. If the overall market took a turn for the worse, all of these slightly troubled developers would likely take a nose dive. Any stock that has trouble paying its bills usually gets trashed in a major downturn.

The slowest grower, PXD, (5 year EPS Growth Estimate per annum = 8.50%) is the one that is most stable. My inclination would be to take a chance on it. It may do much better than it is saying it will.

Two of the above companies are highly held by institutions -- NFX (98.98%) and FST (98.43%). Usually institutions will not own a stock this heavily unless they deem it “safe.” NFX also has large lease holdings in the prolific Bakken shale play. It seems almost guaranteed to do well eventually. Its FPE of 10.75 makes it a reasonable buy. FST has an FPE of 10.37. It also seems a reasonable investment.

HK, SM, and APC are all more speculative investments, although for different reasons. Still they have the highest 5 year EPS Growth Estimates per annum. They might be worth speculation. However, with the market almost daily finding some new economic crisis, now might not be the best time to invest in these. Naturally the most speculative stocks can usually give you the best reward. Not surprisingly they also trade at the highest multiples. I should add that I have not been very impressed with the management of SM. It is now selling assets. Plus its Niobra shale holdings may turn out to be not as good as many originally thought they would be. The Niobra could be a money eater for SM. The fact that HK missed estimates 3 out of the last 4 quarters doesn’t speak well of its management either.

The 2 year chart of each may provide some technical insight (click to enlarge):

The 2 year chart of HK

Click to enlarge 

The 2 year chart of NFX

Click to enlarge 

The 2 year chart of PXD

Click to enlarge 

The 2 year chart of APC

Click to enlarge 

The 2 year chart of SM

Click to enlarge 

The 2 year chart of FST

Click to enlarge 

The charts show that these stocks are at oversold or near oversold levels. If you are going to buy one or more of them, now is likely a good time to start legging in. HK may have a tremendous future, but the chart does not look great. I think I would prefer more safety than this stock. The NFX chart seems to show it is in a buyable dip. Ditto the PXD chart. APC was clearly hurt by Macondo. It is not clear that it will not be hurt more. I would tend to stay away, although it looks like a fundamentally sound stock. I will keep it in mind for the future. The SM chart looks great. It appears to be in a buyable dip. However, it is not as oversold as the other stocks, and I am not as impressed with its management. Plus the Niobra shale could turn out to be a money user instead of a money generator for a lot of companies. If so, this might keep SM from being as profitable as it foresees. With its high multiple, I would tend to stay away at this time. The FST chart still looks strong, but it looks perhaps beyond oversold. It looks perhaps “broken.” I might stay away from this stock until its chart starts looking better. Still it is at a major support point. It could rocket higher from here. If you are daring, you might take a chance, but I would put in a stop to guard against a break downward. It’s risky, but I tend to think it will bounce upward soon.



Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PXD, NFX, FST over the next 72 hours.