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I expect M&A activity in the North American energy patch to continue to be strong for the foreseeable future. Oil and gas fracking technology is advancing at a rapid pace, unlocking previously unreachable reserves in an exponential manner. Some of the oil majors were late in the game and I believe they will continue to try to add to their reserves via Wall Street. Here are two small producers with increasing production and earnings as well as reasonable valuations that could find themselves in the crosshairs in 2012.

Warren Resources (NASDAQ:WRES) –

Warren Resources, Inc., an independent energy company, engages in the exploration, development, and production of onshore crude oil and gas reserves in the United States. It primarily explores for oil reserves in the Wilmington field in California; and natural gas in the Washakie Basin in Wyoming. (Business description from Yahoo Finance)

4 reasons WRES has deep value at $3 a share:

· Warren is showing solid EPS growth. The company earned 31 cents in FY2010, should make 42 cents in FY2011 and analysts believe it will turn 46 cents a share in FY2012.

· Even more impressive is its revenue growth. It should touch almost 17% sales growth in FY2011 and analysts believe it will produce over a 20% revenue increase in FY2012.

· The company just secured a $300mm credit facility which will allow it to substantially increasing drilling and production.

· The mean analysts’ price target on WRES is $4.50 and Brean Murray just initiated the stock as a “Buy”.

Gulfport Energy (NASDAQ:GPOR) –

Gulfport Energy Corporation engages in the exploration, development, and production of oil and natural gas properties. Its principal properties consist of the West Cote Blanche Bay and Hackberry fields in the Louisiana Gulf Coast; and the Permian Basin in West Texas.

(Business description from Yahoo Finance)

4 reasons Gulfport is a buy at $32 a share:

· Credit Suisse has an “outperform” rating and a price target of $41 on Gulfport. Global Hunter Securities also just upgraded the stock to accumulate in December.

· It has a very low five year projected PEG of .3 and is selling for 11 times operating cash flow.

· The company will double its earnings this year. It made $1.07 in FY2010 and should make $2.18 in FY2011. Analysts currently have $2.46 a share pegged for FY2012 but I would look for that to go up if energy prices stay at current levels.

· It has 125,000 acres in the emerging Utica shale region. It has other assets that it could divest to pick up extra acreage in Utica, or it would make an attractive buyout candidate (It has less than a $2B market capitalization) if the results from Utica continue to be extremely positive.

Source: 2 Small Energy Producers That Make Sense As Acquisition Targets In 2012