A constituent of the Clear Spin-off Index, Mariner Energy Inc. (ME), has been one of the fastest growing contributors to both the index, and the ETF’s (symbol CSD) overall performance. Operating primarily in West Texas and the Gulf of Mexico, ME is an independent oil and gas explorer, developer and producer. The firm has successfully capitalized on promising industry trends, the rising price of the commodities it extracts, and its strong business building since its recent separation from its parent company.
Mariner Energy formally completed its spin-off from Forest Energy Resources Inc. on March 2, 2006, establishing the newly independent firm as a leading competitor in the Gulf of Mexico. Facilitating this status were strong revenues, minimal debt financing, and sufficient opportunities for expansion. Performing as a classic spin-off the stock eventually sunk to under $15 in the summer of 2006, and closed Tuesday at $24.49, which is off its peak of $25.87, which was achieved in mid-June of this year.
The firm’s first year proved largely positive, with a 69% success rate on wells drilled in the Gulf, and a 100% success rate in similar endeavors throughout West Texas. Drilling efforts are expected to continue in these regions, with a $658 million capital expenditures budget allocated for 2007. Preliminary performance figures from the first fiscal quarter of this year point to money well spent, with net production having increased by 142% over the same period in 2006.
The price of oil and gas sold to market despite all the headlines is near is on par with where it was last year at this time. Geopolitical forces and ever increasing needs from global growing economies point to sustained or growing demand for energy well beyond the growth of alternative fuels.
These trends along with the laser focus of spin-off firm as outlined above has had a predictable impact on company income, with stellar year-over-year revenue growth of 230.23%. Extending this statistic to net income yields a similarly impressive 200.05% growth. Additionally, the firm’s conservative approach to debt financing translates into a 47% debt to equity (D/E) ratio, which is well below the industry average of 84%. Our multi-factor models appreciate this approach to the balance sheet.
Profitability measures have kept pace with the firm’s extraordinary growth, resulting in an operating margin of 33.83% relative to its peer group average at 29.25%. Return on asset [ROA] and return on equity [ROE] statistics are also noteworthy at 5.91% and 12.17% respectively.
Surprisingly, a valuation analysis points to insufficient market pricing, with Mariner’s price to earnings (P/E) ratio of 14.04 below the 16.88 industry average. Factoring in earnings growth via its price to earnings to growth [PEG] ratio of 0.63 underscores this analysis. Adding the valuation measures with ME’s strong and growing fundamentals, we calculate that this equation points to further stock price appreciation.
ME 1-yr chart: