As investors, we need to be sure than the companies in which we invest are true moneymakers. Above all else, the true value (and success) of a business will be determined by its ability to generate cash. Take a look at the companies below that seem poised to increase profits into next year.
ATP Oil and Gas Corp (ATPG) is well positioned to make serious cash into 2012. ATPG is an exploration and production (E&P) based in Houston, TX, and operates primarily in the Gulf of Mexico, the United Kingdom, and Dutch territories of the North Sea. This business has a small market capitalization of $534 million, but it has nearly $200 million in cash. Additionally, the 2010 oil reserve estimates of ATPG totaled 126 million barrels. Into 2012, if oil traded at $100 a barrel (not an unreasonable prospect) the reserves of ATPG could be valued conservatively at $10 billion.
ATPG is highly leveraged, but it is clearly comfortable with the associated risk. It has made bigger bets on the value of its reserves and the future of the natural gas industry than most of its competitors like Chesapeake Energy Corporation (CHK) and Forest Oil Corp (FST). But in this business, it pays to make big bets. If high oil prices endure, and ATPG is able to make it out of this cycle before its debt sinks the business, it will make more money than any of its competitors. Look for the announcement of its 3rd quarter results on November 9th, 2011.
Let’s take a look at another independent oil and natural gas player – Sandridge Energy, Inc. (SD). I believe 2012 will be a good year for this business, should the price of oil trend higher. It has over 500 million proven reserves of oil and natural gas, of which nearly half are oil plays. The reserve estimates are promising, but it’s more important to note that SD is already making serious cash. It has royalty interests in more than 5,000 producing wells, and it has at least 24 wholly owned wells producing across Texas, and Mississippi.
SD is on the up and up. Year over year, its earnings have increased nearly 300%. I prefer the positioning of SD to a business like Brigham Exploration Company (BEXP), a natural gas operator that trades at 50 times earnings. Many of these independent oil and gas businesses have a critical advantage that the large energy corporations do not-- mobility. SD can move toward producing its oil reserves in periods (like now) when natural gas is at a multiyear low. Larger corporations do not have this flexibility.
SD CEO Tom L. Ward told investors on a recent conference call that the business is well on its way to executing a 3-year objective to triple its EBITDA, double its oil production operations, and reduce its debt to earnings before interest, taxes, depreciation and amortization (EBITDA) by half. Into 2012, SD intends to begin operating 26 new rigs. Into 2012, the company stands to increase its operating income significantly. The moral of this story is that SD knows what it is doing. Its headquarters are in Oklahoma City, and the men running this shop have a tight grip on the operating income of the business. I like this business, but it will need to figure out how to distribute money to its shareholders to attract proper investor attention.
Another Oklahoma independent energy company, GMX Resources, Inc. (GMXR) is also poised to realize high profits into next year. It has proved reserves of more than 300 billion cubic feet of natural gas in the Bakken Shale, Haynesville Shale and Cotton Valley Sand Formation in East Texas. It’s no secret that the United States has plenty of natural gas. Discovering the practical application for this resource (besides heating our homes and stoves) remains the million - or billion! - dollar question. If the price of natural gas starts moving north, GMXR will reap tremendous benefits. It currently trades at $1.89, down from its 2008 high of $70 per share. Instead of a business like Cabot Oil and Gas Corp (COG) that trades at 60 times earnings, I’d rather bet on an emerging business like GMXR that has tremendous upside potential.
I like the fact that GMXR is a family business. The Chairman, Ken L. Kenworthy Jr. is the son of the founder and director, Ken L. Kenworthy Sr. The people at the helm of this company are intimately aware of its operations in ways of which no one else is privy. This business is headed toward a year of great earnings, but it is still unclear whether or not GMXR can create value for its shareholders.
Shares of Ford Motor Company (F) have tumbled over the last year. The American automaker earns $1.74 per share and trades at just over $11 per share. A 6.5 price to earnings multiple is low for such a dominant business in its industry. F has improved its gross margins year to date and it has more than $20 billion in cash on its books. Compared to Toyota Motor Corp (TM), a business that has negative quarterly earnings growth of nearly 100% and trades at 36 times earnings. F looks like a good buy.
For this automaker, the future is bright. The initiative to manufacture “Green” cars that run efficiently presents an opportunity for the company to increase its productivity and sales. Labor issues with the United Auto Workers have been put to rest, which should yield a work environment free from the hassles of legal quarrels.
Over the past year, shares of Cisco Systems (CSCO) have been unloved on the Street. This massive networking and solutions company pays manages a 14% return on equity. How will CSCO fare into 2012? Consider this – the core business of CSCO is essential to other companies that seek to maximize operating potential. CSCO is well equipped to handle an influx of business, and can confidently issue a 1.3% dividend to its shareholders. I prefer CSCO to its French counterpart, Alcatel-Lucent (ALU), a business that has debt amounting to more than its market cap and does not distribute a dividend. Similarly, Juniper Networks Inc. (JNPR) of Sunnyvale, California, represents overstated competition. JNPR trades at a significantly higher price to earnings multiple and does not offer a differentiating product that will take market share from CSCO.
CSCO has more than $40 billion in cash on its books that represents about $8 of cash per share. And the stock is trading around $18 per share. That’s a good deal. There is a huge discrepancy between what analysts expect of this company immediately and what CSCO is realistically capable of achieving over the duration of its business
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.