High Growth, Small Cap, Buyout Targets in the Bakken and Eagle Ford (Part I)

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 |  Includes: BHP, GEOI, HK, KOG, MHRCQ, NOG, TPLM
by: David White

BHP Billiton (NYSE:BHP) agreed to pay $15B ($12B in cash and $3B in assumed debt) for Petrohawk (NYSE:HK) late Thursday July 14, 2011. This amounted to $37.25/share. A huge premium given HK closed Thursday at $23.49/share. This effectively raises the prices on all of the oil leases in the major oil shale plays. HK had its acreage spread between the Haynesville, the Eagle Ford, and the Permian Basin. Most of its assets were in natural gas.

The most recent major buys in the Eagle Ford were for approximately $20,000 per acre. The most recent major buy in the Bakken was for approximately $17,000 per acre. These prices are far above the prices of just 1-2 years ago. These were probably $2000/acre or lower. Many oil exploration stocks with lease holdings in these areas are now far undervalued on a mark-to-market basis. A few of the companies that look like attractive buyout targets are: Northern Oil and Gas Inc. (NYSEMKT:NOG), Magnum Hunter Resources Corp. (MHR), Triangle Petroleum Corp. (NYSEMKT:TPLM), Kodiak Oil & Gas Corp. (NYSE:KOG), and GeoResources Inc. (NASDAQ:GEOI).

NOG has 162,000 net acres in the Bakken. MHR has 81,250 net acres in the Bakken and 25,046 net acres in the Eagle Ford. MHR also has 91,870 net acres in the Appalachian Basin of which 56,595 net acres are overlying the Marcellus Shale. Upon completion of the NGAS and NuLoch acquisitions, MHR will have 397,020 net acres in Appalachia, 81,250 net acres in the Bakken, and 51,423 other net acres, which include 50,680 net Alberta acres. TPLM has 72,000 net acres in the Bakken with plans to extend that to 100,000 net acres by the end of 2011. TPLM also has 412,924 net acres in a Nova Scotia play. KOG has 70,000 net acres in the Bakken, 413,00 net acres in the Windsor Block of Nova Scotia, Canada, and 7,000 net acres in the Green River Basin. GEOI has 46,000 net acres in the Bakken, and 24,000 net acres in the Eagle Ford. GEOI also has 29,000 net acres in the Giddings Field -- Austin Chalk, 2,585 net acres of HBP and 534 net acres of owned minerals in the St. Martinville Field, and 14,000 gross acres in the Quarantine Field in LA.

These companies might well draw your attention as stand-alone investments. However, with the added incentive of possible or even likely buyouts of any or all of them by bigger players, they will be that much more attractive. Their share prices will be bid up that much farther. I have only included calculations for the mark-to-market book values of their Eagle Ford and Bakken lease holdings. I have tried to include their other holdings above, although I haven’t attempted to assign values to them.

The table below holds some of the fundamental financial data about these stocks. The data are from TDAmeritrade and Yahoo Finance. 

Stock

NOG

MHR

TPLM

KOG

GEOI

Net Bakken acres

162,000

81,250

72,000

70,000

46,000

Net Eagle Ford acres

25,046

24,000

Value of net acres at $20,000/acre for Eagle Ford and $17,000/acre for Bakken

$2.754B

$1.892B

$1.224B

$1.190B

$1.262B

Market Cap

$1.40B

$931.77M

$294.58M

$1.10B

$649.46M

Enterprise Value

$1.28B

$944.79M

$176.85M

$1.14B

$660.80M

Price

$22.72

$7.50

$6.86

$6.13

$25.51

1 yr. Analysts Target Price

$33.67

$9.55

$10.21

$8.11

$32.17

PE

N/A

N/A

N/A

N/A

22.86

FPE

12.98

19.23

17.59

7.96

11.54

Avg. Analysts’ Opinion

1.4

1.5

1.4

2.1

1.2

Price/Book

3.3

5.41

1.35

4.0

2.12

Price/Mark to Market value of Eagle Ford & Bakken net acres

0.51

0.49

0.24

0.92

0.51

Price/Cash Flow

70.62

--

--

73,688.16

14.8

EPS Growth Estimate for This Year

206.50%

325.00%

102.30%

766.70%

21.60%

EPS Growth Estimate for Next Year

84.20%

333.30%

3,800.00%

196.20%

56.70%

5 yr. EPS Growth Estimate per annum

25.00%

N/A

N/A

20.00%

15.00%

Beta

2.04

1.71

1.76

3.94

1.01

Short Interest as a % of Float

43.08%

19.59%

6.67%

12.91%

18.54%

Cash per Share (mrq)

$2.02

$0.03

$2.85

$0.43

$1.66

Total Debt/Total Capital (mrq)

0%

16.00%

0%

11.94%

0%

Quick Ratio (mrq)

--

--

--

2.95

--

Interest Coverage (mrq)

--

--

--

--

4.73

Return on Equity (ttm)

-0.60%

-39.06%

-16.22%

-5.79%

9.14%

EPS Growth (mrq)

-419.99%

-57.93%

66.22%

-598.03%

-15.75%

EPS Growth (ttm)

-103.01%

-1.98%

-249/58%

-8,101.39%

28.44%

Revenue Growth (mrq)

-65.01%

130.22%

1,459.17%

134.87%

7.76%

Revenue Growth (ttm)

91.79%

175.75%

681.38%

100.23%

17.28%

Annual Dividend Rate

--

--

--

--

--

Gross Profit Margin (ttm)

93.64%

60.22%

79.72%

78.90%

74.18%

Operating Profit Margin (ttm)

-8.66%

-42.15%

-2,028.78%

-3.17%

32.83%

Net Profit Margin (ttm)

-4.26%

-59.86%

-2,013.59%

-32.60%

21.61%

Click to enlarge

As you can see from the information above, all of these stocks are trading at below the mark-to-market book value of their Eagle Ford and Bakken Lease Holdings. This is leaving out any other holdings they have.

TPLM, MHR, KOG, and GEOI have substantial lease holdings in other areas. From a strictly mathematical standpoint TPLM is the best value at a price approximately 0.24 times the mark to market value of its Bakken and Eagle Ford lease holdings.

NOG has an enterprise value below its market cap. Three of the stocks have zero debt (NOG, TPLM, and GEOI). The average of the average analysts’ recommendations for these five stocks is 1.5. It doesn’t get much better than that.

All of these stocks are good investment opportunities, although they might get beaten down in an overall down market. This is an unfortunate trait shared by most companies that are not currently profitable, although all are expected to be highly profitable in FY2012. They are expected to have an average FY2012 PE of 13.86. For high growth stocks that is a highly attractive FPE. If you consider that any or all of these companies could be bought out in the next 1-2 years, these stocks become that much more attractive.

I should warn that NOG has in the recent past been accused of accounting irregularities. I personally don’t find a lot of possible motivation for this, and the idea does seem to be fading slowly. However, any investor should be aware that this situation exists. NOG still has the high short interest (43% of the float) to show that many are still worried. These same people, no matter whether NOG is being deceitful or not, will likely try to drive the stock down, when they get the chance. Of course, they will also likely provide great short squeeze opportunities on good news. To a lesser degree the same short squeeze situation is true of all of the other stocks listed above.

Let’s take a look at the 2 year charts to try to discern some of the technicals for these stocks. Click on each to enlarge.

The 2 year chart of NOG:

Click to enlarge
(Click to enlarge)

The 2 year chart of MHR:

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(Click to enlarge)

The 2 year chart of TPLM:

Click to enlarge
(Click to enlarge)

The 2 year chart of KOG:

Click to enlarge
(Click to enlarge)

The 2 year chart of GEOI:

Click to enlarge
(Click to enlarge)

These stocks are overbought based on the Slow Stochastic subchart of each. For this reason, you may wish to wait for a more appropriate time to buy, given the current EU and US credit concerns.

Alternatively you could decide to leg in slowly. Several of the stocks show extremely strong uptrends. It makes sense to continue to play these trends. The underlying fundamentals seem to be getting stronger, rather than weaker.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TPLM, MHR, KOG, GEOI over the next 72 hours.

Continue to Part 2 >>