Oil and gas names have been surging in response to an oversold environment. When stocks get beaten up, I start taking positions in companies that have outperformed the competition. First and foremost, the sector has to be outperforming the broader market. After this, I develop a list of names within this sector. From this list I choose stocks that are outperforming.
Oil has been the story. The reaction to OPEC's vote against increasing production has been bullish for the price of oil. Saudi Arabia will try to meet demand alone, but it will take some time. This should keep the price of oil high, which turns into large profits, for high growth oil names.
Approach Resources (AREX) is up 297% from its 52 week low. Analysts estimate that Approach will grow 100% this year and 57.7% next. It currently trades for a little over 19 times forward earnings. It has beat earnings for 3 out of the last 4 quarters. The company has 134500 net acres in the Permian Basin, which is 96% of its proven reserves. It has a possible 2780 drilling and recompletion opportunities. Approach has done a very good job of increasing liquids production to an estimated 55% this year. A Wolfcamp well has expected EURs of 353600, with well costs of approximately $3.5 million. Approach seems to be a very good choice as it has accumulated a significant position in the Permian, with multiple locations to drill. On January of this year I wrote an article on Approach. I remain bullish this name, as I believe it has a very good position in the Permian, and has a large number of locations to drill.
FX Energy Inc (FXEN) is one of the few natural gas stocks I favor. It is up 235% from its 52 week high, and it trades at 39 times forward earnings. Five analysts cover this stock and expect growth of 750% this year and 92.3% next year. Be careful with this name, as the company has had two big earnings misses, and two significant beats. This lack of consistency is concerning. FX Energy was a first mover in accumulating leaseholds in Poland, and has 4 million net acres there. Natural gas prices in Poland are much better than in the United States. Poland imports the majority of the natural gas it uses and is motivated to get gas wells on line. FX Energy also has 10418 net acres in the Cut Bank Field just south of Rosetta (ROSE) and Newfield (NFX) leaseholds. These acres are predominantly oil, and could have significant upside. In summary, FX Energy has a bright future. It controls massive acreage in Poland, with very good natural gas economics.
Stone Energy (SGY) is up 211% from its 52 week low. It trades for eight times next year's earnings. Stone is expected to grow 82.9% this year and 7.1% next. Analysts estimate Stone will grow 8% per year for the next five years. It has beat earnings three out of the last four quarters. Stone has made large changes to the company since 2009. It has decreased debt and increased cash on hand. Proved reserves per share and equity market value have increased. Stone plans to use stable GOM production to finance its projects in the Marcellus and Rocky Mountains. Stone has over 75000 acres in the Marcellus, and plans 18 to 20 horizontal wells this year. Stone's Rocky Mountain assets are in three plays.
- Southern Alberta Basin
- Paradox Basin
- Hanna Basin
These assets will contribute very little in the short term, as the GOM and Marcellus will received the bulk of capital expenditures. Stone has turned the company around since the bottom fell out of the stock from 2008 to 2009. I am not as bullish this company as others on the list, but like its Marcellus holdings.
Gulfport Energy (GPOR) is up 205% from its 52 week low. It is trading at 12 times next year's earnings. It has beat or met quarterly estimates in three of the past four quarters. Of the eight analysts covering, its average estimate is 110.3% growth this year and 14.2% next. Gulfport has a bright future, as it has a very large portion of production coming from liquids. Its projects are:
- Canadian Oil Sands-178081 Net Acres
- Utica Shale-25000 to 40000 Net Acreage Commitment
- Niobrara Shale-19172 Net Acres
- Permian-14723 Net Acres
- Southern Louisiana-13998 Net Acres
- Thailand-4 Onshore Concession Blocks
These locations produce 90% crude oil. For a company this size it has a very large amount of resource. Its Canadian oil sands position provides exposure to over 500 million barrels of possible oil resource. Its acres in Thailand could be a world class find. The Wolfberry provides a near term production increase. For more information on Gulfport, please read Gulfport Energy Corporation: Value Play on Diversified Assets. In summary, Gulfport is one of my favorites on this list. With such a high percentage of liquids production and reserves, it is hard not to like this name.
Sandridge Energy (SD) is up 180% from its 52 week low. Sandridge's success is linked to its quick shift from gas to liquids. It has 100% of its rigs drilling for oil, and is second only to EOG Resources (EOG) and Chesapeake (CHK) in total number of rigs drilling for oil. This is important for two reasons. The first is the availability of rigs to move from gas to oil, which is driving the success of all three companies. The second reason is the ability to maintain costs, which has been difficult for oil producers in the first quarter of this year. Sandridge has 185000 net acres in the Permian. This play has a possibility of 7700 locations and is 79% oil. These wells have an EUR of 83 Mboe and IRR of 110%. Sandridge has over 900000 net acres in the horizontal Mississippian. These wells have an EUR of 300 to 500 Mboe, with 52% being crude oil. Sandridge plans to drill 950 wells this year, with 811 in the Permian. I like Sandridge going forward, as I believe the company will outperform. For another way to play Sandridge, check out Sandridge Mississippian Trust I (SDT).
Kodiak Oil and Gas (KOG) is up 163% from its 52 week low. Kodiak has been trading well since its rebound from oversold territory. I currently own this name and believe it is a good long term investment. I think it remains cheap at just over 8 times forward earnings. EPS estimates have been pulling back on this name over the past three months. This and Kodiak's inability to meet earnings expectations are both worrisome, but growth expectations outweigh these concerns. At 900% growth estimated this year and an additional 163.3% next year, Kodiak is growing fast. It has 320 locations and an accelerated drill program to get oil production on line. Kodiak has 70000 net acres in the Williston Basin with both Bakken and Three Forks potential.
All six companies have very good growth prospects. Although these stocks will get crushed if earnings are missed, each has increased upside when compared to slower growing competitors. If oil prices head higher, as I think they will, these companies will grow significantly. If oil prices decrease, these names will have an equal and opposite reaction. When buying these names make sure stops are in place, to protect to the downside. For access to my current portfolio read Bakken, Oil Service, and Refining Plays for the Second Half of 2011.
Disclosure: I am long KOG.