I continue to believe the energy sector offers some compelling bargains with oil trading over $100 a barrel. I particularly like smaller producers that produce both oil & gas that have been temporarily discarded by the market due to low natural gas prices. They are shifting their activities to oil producing assets which should bode well for future earnings and margins. I also see increasing M&A activity as in many cases, it is easier for the majors to buy reserves and they have plenty of liquidity and cash flow to do so. There are myriad small cap players in the energy space. One $5 stock that looks interesting right here is Callon Petroleum (CPE).
"Callon Petroleum Company engages in the acquisition, exploration, development, and production of crude oil and natural gas properties. The company's properties are located in the Permian Basin in west Texas; the Haynesville Shale in northern Louisiana; and the Gulf of Mexico". (Business Description from Yahoo Finance)
7 reasons Callon has plenty of upside from just over $5 a share:
- Insiders have been net buyers over the prior six months.
- The company quadrupled operating cash flow from FY2009 to FY2011.
- CPE is way below analysts' price targets. The median price target by the five analysts that cover the stock is $9.50 a share.
- The company has blown through estimates for four straight quarters. The minimum beat over consensus during that time span has been 40%.
- It has a forward PE of less than 6, significantly below its five year average (15.8)
- The stock is cheap at 3 times operating cash flow and just 7% over book value.
- Analysts expect revenue growth of around 6% in FY2012 but over 50% in FY2013 as more oil production comes on line.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.