The U.S. Energy Information Administration released its monthly Short-term Energy and Winter Fuels Outlook on Oct. 12. The agency’s findings show that although world consumption for oil is expected to continue to grow, its pace will slow slightly. Current inventory should meet some of the demand. Prices remain conflicted between upward pressure from uncertainty of supply and downward pressure from lowered expectations for economic growth. Turmoil in Syria and potential for more sanctions remain significant concerns, as do fears about the European debt crisis and other fiscal issues.
U.S. households that rely on natural gas for heating are expected to spend 3 percent more this winter than last. Expenditures on heating oil, propane, and electricity are also expected to higher, though weather is forecast to be milder than last year.
OPEC production is expected to decline but not at the same level as previously thought. Inventories are expected to decline throughout the remainder of this year and next. Production by non-OPEC countries is expected to rise.
Given these broader market conditions, could now be the time to purchase stock in oil and gas drilling and exploration companies? I consider five domestic oil and gas exploration and production companies below.
Sandridge Energy Inc. (SD) – This oil and gas exploration and production company is currently trading near $7 a share. It has ranged from $4.55 to $13.34 over the past 52 weeks. It does not pay a dividend, and it is showing a trailing twelve-month loss per share of $0.07. Market capitalization is $2.67 billion. Forward price to earnings ratio is 21.06, and five-year expected price/earnings to growth ratio is 10.92. SD’s debt to equity ratio is very high at 2.64.
Production and exploration activities are centered in shallow, conventional oil basins in the Mid-Continent Mississippian areas of northern Oklahoma, and southern Kansas; the Permian area of Texas; the West Texas Overthrust; and other areas of the Gulf Coast and in the Gulf of Mexico. Second quarter 2011 oil and gas production was up 106 percent over the same quarter last year.
SD is positioned for continued growth. The company drilled 238 wells in the second quarter with an average of 29 operating rigs, and 231 of these were brought into production. Most of these new wells – 200 – were in west Texas in the Permian Basin. Management plans to drill over 800 wells in this region in 2011. A total of 38 new horizontal wells were drilled in Oklahoma and Kansas in the Mid-Continent Mississippian Play. Plans are underway to increase rig count in this area throughout 2012. SD is the most active driller in this area. Under a joint venture agreement, Korean investment firm Atinum Partners Co. gave SD $250 million in cash and $250 million in credit in exchange for a 13.2 percent interest in production from the Mississippian oilfields. SD management has acquired 200,000 additional acres, also located in the Mississippian horizontal play.
Company officials announced an offer to exchange privately placed restricted 7.5 percent Senior Notes due 2021 with registered notes with the same interest rate and maturity. SD will release third quarter results after the close of business on Nov. 3. CNBC finance personality and host of the show “Mad Money” Jim Cramer has rated this stock a buy.
Chesapeake Energy Corporation (CHK) is currently trading near $27 a share. It has ranged from $20.97 to $35.95 over the past 52 weeks. Its dividend yield is 1.30 percent or $0.35 a share. Earnings per share is $1.50, and trailing twelve-month price to earnings ratio is 18.18. Market capitalization is larger than SD at $17.34 billion. Its forward price to earnings ratio is 10.07, and its five-year expected price/earnings to growth ratio is 0.86. Its debt to equity ratio is also very high at 2.37.
SD’s current production and capacity for expansion are impressive. It is trading at a very attractive price. It carries a lot of debt, though. Though it carries a number of risks, SD is definitely a growth stock to consider.
Kodiak Oil & Gas Corp. (KOG) – This domestic oil and gas exploration and production company is currently trading near $6 a share. It has ranged from $2.43 to $7.70 a share over the past 52 weeks. It does not pay a dividend. Trailing twelve-month earnings per share is $0.02, and trailing twelve-month price to earnings ratio is 350.56. Market capitalization is $1.32 billion. KOG’s forward price to earnings ratio is 8.3, and its five-year expected price/earnings to growth ratio is 1.15. Its debt to equity ratio is .47.
Its reserves and operations are centralized in North Dakota and Montana’s Williston Basin and in Wyoming and Colorado’s Green River Basin. In June, KOG acquired 25,000 additional acres in North Dakota for 2.5 million shares and $71.5 million. Second quarter sales of $22.1 million were up 261 percent. Expenses were up, and company officials attributed the increase to new hiring as the company expands operations. Its projects, which include several horizontal drilling projects, are progressing on or ahead of schedule. Management said second quarter results were the strongest in the company’s history. Reports say that five wells with promising production results have been completed in September and October. Speculators suggest KOG could be a prime takeover target.
Its competitor Double Eagle Petroleum Co. (DBLE) is currently trading near $8 a share. Its 52-week range is $4.14 to $12. It is showing a loss per share of $0.12. Market capitalization is $88.90 million. Its five-year expected price/earnings to growth ratio is 14.66. Its debt to equity ratio is 1.13.
KOG’s price is right. Production is strong. Its debt to equity ratio is within an acceptable range. It is moving forward from its best quarter ever. KOG is another very promising small-cap oil and gas company.
GMX Resources Inc. (GMXR) – This company also conducts exploration and production activities in the Williston Basin/Bakken Shale formation of North Dakota and Montana and the DJ Basin/Niobrara Formation in Wyoming. It also holds interests in natural gas resources in the Haynesville/Bossier Formation and the Cotton Valley Sand Formation in east Texas. It is currently trading just over $2 a share with a 52-week range of $1.57 to $6.48. It is showing a loss per share of $5.62. Market capitalization is $135.94 million. Its forward price to earnings ratio is 234.00, and its five-year expected price/earnings to growth ratio is 01.81. Its debt to equity ratio is 0.32.
The company drilled four and completed three horizontal wells during the second quarter. Production was up 8 percent over the first quarter and 51 percent over the same quarter in 2010. Company officials said it suspended development of Haynesville/Bossier natural gas units, subleased its rig, and is focusing capital expenditures on oil development. Production and revenue are expected to increase from 9 percent and 21 percent to 16 percent and 31 percent respectively by the end of the year.
Cabot Oil & Gas Corporation (COG) is currently trading near $69 a share. Its 52-week range is $27.81 to $78.94. COG offers a dividend yield of 0.20 percent or $0.12 a share. It is showing earnings per share of $1.14 and a price to earnings ratio of 59.86. Market capitalization is $7.13 billion. Its five-year forward price to earnings ratio is 26.55, and its price/earnings to growth ratio I s1.47. Debt to equity ratio is 1.16.
GMXR is also trading at a very attractive price, but it lacks the track record of SD and KLG. Management is focused on growth in areas known to produce and is keeping debt in check. Forecasts are promising. GMXR is also a promising investment that deserves additional research.
Stone Energy Corp. (SGY) - This oil and gas exploration and production company focuses on properties in the Gulf of Mexico and the Appalachia region. It is currently trading near $21 a share. Earnings per share is $2.87, and price to earnings ratio is 7.46. Market capitalization is $1.03 billion. Its forward price to earnings ratio is 6.47, and its five-year expected price/earnings to growth ratio is 0.70. Its debt to equity ratio is a little high at 2.4.
The company posted net income of $57.2 million from its oil and gas operations, which was up from $27.9 million from the same quarter in 2010. Officials announced the discovery of deep gas reserves at the LaPosada well, of which it holds a 25 percent working interest. Its South Erath deep gas well encountered two pay zones. Stone holds a 14 percent interest in this. Its drilling program at the Amberjack Field was almost complete. Its interest in this area is 100 percent. SGY also holds interests in the Marcellus Shale Play, the Hatch Point Field/Cane Creek formation in the Rocky Mountain Region, and the Eagle Ford shale area. Officials expect these areas to be drilled in throughout the remainder of the year.
Its larger-cap peer Apache Corporation (APA) is currently trading near $90 a share. Its dividend yield is 0.70 percent or $0.60 a share. Earnings per share is $9.95, and price to earnings ratio is 9.06 Market capitalization is $34.61 billion. Its forward price to earnings ratio is 7.59, and its five-year expected price/earnings to growth ratio is 0,84. Debt to equity ratio is 1.34.
SGY is also well priced and positioned for growth. It is another domestic oil and gas company that could make a nice addition to the right portfolio.
Hercules Offshore, Inc. (HERO) – This offshore exploration, production and marine services company is currently trading near $3 a share. It is showing a loss per share of $1.16. Market capitalization is $461.89 million. Its five-year expected price/earnings to growth ratio is -0.42. Debt to equity ratio is .55.
Diamond Offshore Drilling Inc. (DO) is currently trading near $60 a share with a 52-week range of $51.16 to $81.19. Its dividend yield is 0.80 percent or $0.50 a share. Earnings per share is $6.89, and price to earnings ratio is 8.68. Market capitalization is $8.31 billion. Forward price to earnings ratio is 12.25, and five-year expected price/earnings to growth is 0.85. Debt to equity is .63.
The company owns an impressive fleet of 50 jackup rigs, 17 barge rigs, 3 submersible figs, 1 platform rig, and 65 liftboats. It reported a loss from operations for the second quarter, though it was not as great a loss as during the same quarter 2010. Domestic offshore revenue rose to $48.6 million, which was up from $34.1 million for the same period 2010. Rig utilization declined, but the total number of working days increased. Operating expenses increased as well. International offshore revenue declined slightly, but utilization increased. Operating expenses increased, too.
I’m not as impressed with its metrics as I am with the other companies mentioned here, but given the industry outlook, I would absolutely move forward with more research on this company. HERO could be a real performer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.