Eagle Ford and Bakken Players Forecast to Gain More Than 75%

by: David White

More and more people are now saying the market has bottomed near term. They are no longer talking about catching a falling knife. Now they are talking about getting in near a bottom, so they can catch more upside movement.

With this in mind, what stocks do you think are likely to have been hit the hardest?

What is normally the case is that smallish growth stocks get hit the hardest by such downturns. They have high betas. Many have cash and credit problems. Many have yet to generate enough revenue to begin to cover their operating costs and capital expenditures from revenues. Even some that are financially stronger have gotten beaten down on fears that their growth in revenues will be severely affected by a feared world economic downturn.

Let's look at some of the oil companies whose one year analysts' target prices would translate into more than 75% gains for the respective stocks after the recent crash. A few of these are: American Standard Energy Corp. (ASEN.OB), Magnum Hunter Resources Corp. (MHR), Crimson Exploration Inc. (NASDAQ:CXPO), Abraxas Petroleum Corp. (NASDAQ:AXAS), Denbury Resources Inc. (NYSE:DNR), and Northern Oil and Gas Inc. (NYSEMKT:NOG).

I should note that NOG has in the not too distant past been accused of accounting irregularities. Since NOG has no debt, I cannot see much motivation for this. Since the time of the accusations, nothing has been proven to my knowledge; and the force of the accusations has faded. In fact NOG was upgraded by Global Hunter Securities on Aug. 10, 2011 from Neutral to Accumulate.

The lease holdings of these companies alone would tend to put them above their current market caps. The most recent big sale in the Eagle Ford went for about $20,000/acre. The most recent big sale in the Bakken went for about $17,000/acre. These companies generally have their acreages on their books for a fraction of these values. The book values they report are therefore generally huge underestimates.

The companies have the following holdings (as these are ever changing they may not be completely up to date):

NOG has approx. 155,000 net acres in the Bakken/Three Forks.

CXPO has 51,305 net acres in South Texas targeting the Eagle Ford, Lower and Middle Wilcox, and the Frio-Vicksburg. It has 14,591 net acres in southeast Texas targeting the Yegua, Cook Mountain, and the Georgetown. It has 12,408 net acres in Colorado and other areas targeting the Niobrara and the D&J Sands. It has 12,759 net acres in East Texas targeting the Haynesville Shale, Mid-Bossier, and the James Lime.

AXAS has 143,606 net acres in the Rocky Mountain, Mid-Continent, Permian Basin, and Gulf Coast regions of the United States, as well as in the province of Alberta, Canada (as of Dec. 31, 2011).

MHR has 58,048 Net Marcellus acres. It has 273,000 Net Southern Appalachia acres. It has 24,872 Net Eagle Ford acres. It has 80,623 Net Bakken/Three Forks Sanish/Madison acres.

ASEN.OB (in June 2011) entered into a letter of intent to purchase 15,000 net acres in the Bakken. This would bring its net Bakken acreage to 48,000. In the Eagle Ford ASEN has agreed to a transaction that when completed will increase its acreage holdings in the Eagle Ford oil window from a 10% Working Interest in 12,000 net acres (two rigs presently running with 8 wells in various stages of development) to a total of over 20,000 net acres. In the Permian Basin in the Wolfcamp Shale in West Texas, ASEN entered into an agreement to purchase a 100% Working Interest in over 12,800 acres of the "Wolf camp Horizontal Play" (10,000 acres of which are Held By Production). In the Permian Basin in the Avalon, Wolf-Bone Play in South Eastern New Mexico a tentative agreement has been reached whereby ASEN will acquire various non-operated working interests in over 65,000 gross acres (approximately 14,400 net acres).

DNR engages in the acquisition, exploration, drilling, and extraction of oil and natural gas properties in the Gulf coast region in Mississippi, Texas, Louisiana, and Alabama. It has properties in Montana, North Dakota, Utah, and Wyoming. It owns a Carbon Dioxide (CO2) source that is located near Jackson, Mississippi. It has266,000 net acres in the Bakken. DNR has entered in to an agreement to acquire working interests in Riley Ridge Federal Unit located in southwestern Wyoming as well as mineral leases adjoining the unit from Cimarex Energy Co. (NYSE:XEC). DNR has recently entered into a JV agreement with Encana Corp. (NYSE:ECA) to develop its 105,000 gross acres (79,000 net acres) in the Tuscaloosa Marine Shale. DNR's website provides scant detail about its holdings. However, they are more extensive than the small amount of detail I have described above. The Bakken holdings are probably the future gem. Notably DNR had great Q2 2011 earnings of $0.37/share (excluding one time items). This beat expectations of $0.33/share, and it was twice as good as the year ago result of $0.18/share. The company raised its capital expenditure budget to $1.35B from $1.3B. It is bullish for 2012 on oil production at Hastings and Oyster Bayou and accelerated drilling in the Bakken.

Let's take a look at some of the financial fundamentals of these companies. The data in the table below are from Yahoo Finance.

Price $4.90 $4.79 $2.82 $3.38 $15.53 $18.75
1 yr analysts target price $14.00 $9.61 $5.59 $6.22 $28.10 $33.56
Gain Forecast 186% 101% 98% 84% 81% 79%
PE N/A N/A N/A N/A 21.87 N/A
FPE 15.31 15.45 282 8.45 10.56 11.16
Analysts Opinion 2.0 1.5 1.8 1.1 2.0 1.6
EPS Growth in 2011 N/A 200.0% 69.0% 480.0% 96.8% 167.7%
EPS Growth in 2012 3100% 675.0% 105.6% 110.5% 20.5% 102.4%
5 yr. EPS Growth per annum 35.0% 121.0% 10.0% N/A 24.5% 25.0%
Market Cap $183M $595M $186M $310M $6.19B $1.15B
Enterprise Value $165M $634M $295M $404M $8.28B $1.03B
Price/Book 3.53 3.56 0.72 6.50 1.33 2.64
Cash/Share $0.49 $0.03 N/A $0.05 $0.53 $2.02
Beta 0.75 1.71 1.73 1.29 1.32 2.01

I have just tried to identify oil stocks in the Bakken and the Eagle Ford which may return large gains to investors. These fields are prolific. There is a much smaller chance of disappointment by investing in companies developing them.

The fundamentals of the above companies all seem reasonable. The larger cap companies above will likely be the safest investments. However, all are likely good investments. DNR is a fiscally strong company. Others may be getting there soon. They are a bit more speculative, but such speculation may be worth it. When you look at the forecast 186% gain in ASEN.OB, you have to think it may be worthy of a small investment, especially when you notice its beta is only 0.75. MHR is an extremely well though of company. With a 121% 5 year EPS Growth Forecast per annum, how could it not be? NOG has no debt and good potential.

You should use your own judgement about these stocks, You should do further research. This article is meant as an alert to potentially great gains. I have tried to include some relevant information about each company, but it is not complete. FYI, the most recent big sales of lease holdings in the Bakken indicated a price of $17,000/acre and in the Eagle Ford $20,000/acre. NOG may be the easiest value comparison. With 155,000 net acres in the Bakken, its book value for those acres alone might be said to be $2.635B. This is far more than its current market cap or enterprise value listed above. These stocks are great growth plays. Plus they are great value plays too. You shouldn't be able to go too far wrong. Obviously small companies can get beat up badly in a bad overall market. This has happened to these stocks recently. It makes them that much better investments now. However, you should be prepared for possible downward movements if the market turns downward again. I think the best plan may be to think of each of these stocks as something you may need to hold for up to two years. Of course, you may see great gains in that time.

Good Luck Trading.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MHR, ASEN.OB, DNR, NOG over the next 72 hours.