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The North American energy industry is being transformed by oil and natural gas fracking technology. As the result of this game changing technology, natural gas and oil produced from shale is growing impressively in North America. Oil Majors are taking notice and have made several acquisitions of smaller E&P outfits in the last year. Here are two small E&P concerns that have good valuations and impressive production growth that could eventually be ending up being acquired at a premium.

"Ultra Petroleum (NYSE:UPL), an independent oil and gas company, engages in the acquisition, exploration, development, production, and operation of oil and natural gas properties in the United States. It primarily focuses on developing a tight gas sand trend located in the Green River Basin of southwest Wyoming; and assessing, exploring, and developing its position in the Marcellus Shale and deeper horizons located in the north-central Pennsylvania area of the Appalachian Basin." (Business description from Yahoo Finance.)

5 reasons Ultra Petroleum looks like a good long term investment at $34:

  1. Ultra Petroleum is growing production rapidly. It grew output 19% in 2010, is projected to increase production by 15% in 2011 and another 19% in 2012.
  2. UPL’s cost structure is among the lowest in E&P universe, providing it with a lower break-even threshold.
  3. Ultra Petroleum has a forward PE of just 13, which is an over 40% discount to its five-year average.
  4. Given its leading position in the Pinedale field in Wyoming, growing production in Marcellus Shale, and a market capitalization of just over $5B, it would make a logical and compelling pickup for a larger energy concern.
  5. Ultra Petroleum is selling at less than analysts’ price targets. The median analysts’ price target is $47 on Ultra.

"QEP Resources (NYSE:QEP), through its subsidiaries, operates as an independent oil and natural gas exploration and production company. It acquires, explores, develops, and produces oil, natural gas, and natural gas liquids in Haynesville/Cotton Valley in northwest Louisiana; Midcontinent properties in Oklahoma, Arkansas, and Texas; the Pinedale Anticline in western Wyoming; the Uinta Basin in eastern Utah; and the Rockies Legacy properties in Wyoming and North Dakota.” (Business description from Yahoo Finance.)

5 reasons QEP is a solid buy at $34:

  1. QEP is selling near the bottom of its historical valuation range based on P/E, P/S, P/B and P/CF.
  2. It recently up its production guidance for 2011. It expects to raise output 18% to 20% for FY2011, an impressive rate of capacity growth.
  3. QEP has a five year projected PEG of under 0.9, which is an almost 40% discount to its five year average.
  4. At six times operating cash flow, growing production, interesting properties and market cap of $6B, this would be an enticing acquisition for a bigger energy company.
  5. QEP is priced under analysts’ price targets. The median analysts’ price target on QEP is $50, S&P is at $42 and Deutsch Bank recently tagged QEP as a “buy.”
Source: 2 Small Shale Concerns With Compelling Valuations