There's no question about it that the oil and gas industry is definitely booming. The cost of energy is surging as demand from Asia is on the upward trend, and, consequently, investors are anything but shy to become proud shareholders of oil and gas companies. While some companies such as Exxon Mobil Corporation (XOM), Chevron Corporation (CVX) and British Petroleum (BP) have attracted most investors, driving their share prices higher and some smaller independent oil and gas companies remain overlooked, many of these companies are undervalued. Below are six of my best ideas among undervalued oil and gas companies that investors should consider. Please use this analysis as a starting point in your own due diligence.
GMX Resources, Inc. (GMXR): Shares of GMX continue to bounce between a $1 and $1.50, down 82% from their 52 week high $6.50. There's no doubt about it that GMX is a risky investment; almost speculative, however the company is extremely undervalued and can provide substantial returns for risk seekers. Despite current cash flow woes, increasing expenditures and the firm's high leverage, some investors may find GMXR to be the perfect addition to their portfolio. Sales have grown slightly from 2009 to 2010, and the trend has continued in the first three quarters of 2011. The company has reported a net loss for of $138 million in the first quarters of 2011, mainly due to $127 million of impairment charges.
The price to sales industry average is currently 5.53, however GMXR is currently trading at .59. Furthermore, according to the company's most recent 10Q, management has opted to pursue oil (acquisition, development, and exploration of additional oil properties) the approach is lucrative and will provide additional wealth for investors. This new business strategy and discounted share price makes GMXR a potential investment for investors with an appetite for risk. This is a great candidate for further research.
Hercules Offshore, Inc (HERO): Shares are trading just under $4 a share, down from their 52 week high, but also almost 45% up from their lows of $2.25. Using the P/S metric the company is undervalued, currently trading at a multiple of .82 compared to the industry average of 3.51. Moreover, the company is currently trading less than its book value per share of $6.74. According to the company's 8K, the company has completed an acquisition of 20 additional rigs in the Gulf of Mexico, aimed at increasing production and profits in 2012 and beyond.
With Hercules there is potentially great upside potential with some production and acreage acquisition risks. However, the company is liquid with a current ratio of 2, $127 million of cash and $856 million of debt outstanding. It is likely capable of meeting its short term debt obligations. This is a great stock for additional research into its production risk.
Kodiak Oil & Gas Corporation (KOG): Although shares are only trading within 10% of their 52 week high, KOG is likely deeply undervalued. The company has doubled revenue each year since 2008. KOG is anticipated to triple revenue by the end of fiscal year 2011, and thus far revenue has grown at 263% each quarter on a year over year basis.
KOG has maintained an impressive profit margin in the range 43% to 44% throughout 2011. KOG is a relatively liquid, long term alternative for risk adverse investors as the company only has $55 million in debt outstanding and $78 million of cash on its balance sheet. A current ratio of 2.5 reaffirms the company's strong and liquid balance sheet. The company has also tripled its investment in long term revenue generating assets (rigs) in 2011. Share are currently trading at a forward P/E multiple of 9.3, indicating shares are undervalued. This is a great candidate for further research.
Royale Energy, Inc (ROYL): Shares are currently trading around $4.50, roughly between their 52 week high and low of $7.90 and $1.73. Sales have grown marginally at 1.6% each quarter on year over year basis however the company has effectively managed expenditures.
Cash has increased 10% to $5.1 million since 2010. In addition to an increase in oil and gas producing properties. As Royale's balance sheet has grown, profit outlook for 2012 increase and investors are positioned to earn additional wealth. ROYL is a sure buy as shares are trading at a P/S multiple of 3.93 below the industry average of 5.3. This poorly-covered name is a great candidate for additional research into its production capabilities.
Sandridge Energy Inc. (SD): Shares are currently trading around $8, down 40% from their 52 week highs of $13.25 and up 77% from the 52 week lows of $4.55. Sales have grown considerably each quarter, at a rate of 48% on a year over year basis; outperforming the industry growth rate. Moreover, profits have grown at 88% each quarter, with the shift to oil that I anticipated being the key driver. Like the other Oil and Gas companies listed in this article, Sandridge has acquired additional long term assets in order to increase shareholder wealth. With shares trading at a P/S multiple of 2.4, below the industry average of 3.51, SD is likely undervalued. However, investors should be cautious as the company is highly levered and should do their due diligence before allocating capital.
Stone Energy Corporation (SGY): Shares of Stone Energy are trading around $28, halfway between their 52 week lows and highs of $14.64 and $35.95. The company has performed exceptionally in 2011 and the outlook for 2012 is even brighter. Quarterly revenues have grown at 35.6% on a year over year basis, and as an indication that the company has become more effective, the revenue increase has led to an earnings growth of 168% on a year over year basis.
Stone Energy is a good research candidate for investors looking for value and growth. Shares are currently trading at a P/E multiple of 7.3, which is significantly below the industry average of 16. Moreover, shares are also trading at a discounted P/S ratio of 1.6, below the industry average of 5.5.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.