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A little over eight months ago we wrote this article about some under the radar Eagle Ford Shale plays. While Carrizo Oil & Gas (NASDAQ:CRZO) and C&J Energy Services (NYSE:CJES) might be better known stocks, both have struggled even as the liquids rich basin has produced strong earnings for the companies. The market clearly has lumped both of them into the nat gas price collapse.

The Houston Chronicle had some interesting stats regarding the Eagle Ford relayed from the Energy Symposium:

  • Director of energy research at ITG Investment Research expects production to reach 1 million barrels a day by 2016
  • Roughly 1,400 wells are waiting to be completed or to be tied into pipelines due to shortages of crews, water, and pipelines.
  • For 2011, oil production increased 7 fold to 30.5 million barrels while nat gas production rose a little more than double to 243 billion cubic feet.
  • On path to become the second-largest producing area once all the bottlenecks are cleared up only behind the Bakken shale.

The production stats are interesting, but most alert investors probably knew the huge growth and potential of the area. The most surprising comment was the lack of crews. The oil service sector stocks have been pummeled this year due to the fear of too little demand.

Part of the issue with the crews has been the dynamic of having to move them from gas areas into the liquids rich basins. Potentially the issue isn't as much lack of crews, but lack of crews in the areas where work still exists.

While all this upheaval has taken place, the market appears to have missed that nat gas prices are on the rise jumping to $2.74 per Mcf on Friday. The futures prices quickly jump into the $3-4 range as winter 2013 rolls around. The slumping drilling demand might just snap back sooner than expected.

Leading Eagle Ford exploration company, EOG Resources (NYSE:EOG), has much loftier valuations than our picks. The stock currently trades at 15x forward earnings of $6.50. With a $26B market cap EOG provides a higher level of safety, but it does further highlight the skittishness in the markets.

Even EOG has dropped around 20% from a recent double top around $120. The stock is a compelling long term investment for those looking for a large cap focus on the area. IncomeHunter had a good review of the stock for those interested.

Back to our small cap picks. Both companies offer incredible values especially compared to large cap EOG. Below are summaries of what both companies been up too since our last report.

Carrizo Oil & Gas - This company reported disappointing Q311 and Q411 results that missed estimates, but during that period it made plenty of progress towards the goal of becoming liquids focused.

The break finally came via the Q112 results that smashed the $.38 estimate by earning $.45. This amount was double the flat earnings from the previous 3 quarters providing that breakthrough that investors had expected in 2011.

Carrizo went from still being considered a natural gas company to one that produced 74% of revenue from oil. With the Eagle Ford now producing from 37 wells and Niobrara from 14 wells, it now forecasts Q212 daily oil production at around 7,000 barrels up from 4,000 in Q411. The combined 51 wells producing oil compares to only 8 wells producing back in September.

The company sold off a lot of production in the Barnett Shale in order to improve the balance sheet. It also owns a well in the North Sea expected to produce 4,500 Boe/d in Q4. Look for Carrizo to monetize this asset as well now that the JV in the Utica Shale has acquired some attractive leases. The company must declare whether to increase its investment from 10% to 50%.

Analysts expect over $4.5 in 2013 earnings so any similar multiple to EOG would place the stock at a significantly higher price than the current $25.

C&J Energy Services - As the leading independent oil services firm focused on the Eagle Ford, it is extremely disappointing that the stock has not performed the last eight months. The company has had solid results with only some small impacts from the nat gas disruptions.

Back in September, the company had just started utilizing hydraulic fracturing Fleet 5. Now the company is expecting delivery of Fleet 8 this quarter which would double the fleet in less than a year. Also, C&J went ahead with ordering fleet 9 for the end of 2012. All while most in the industry have cut back on capital expenses.

The majority of the fleets are now working in the Eagle Ford with some work in the Permian basin. The company is also looking into expansion into the Bakken Shale and the Middle East.

The incredible part of this story remains the incredible 35% adjusted EBITDA margins amongst the highest in the industry. It has also been able to grow rapidly without incurring any debt. All of the new fleets were built on either IPO money or operating cash flow. While some investors question the aggressive growth plans in a downturn, the strong companies tend to take market share in those periods. C&J appears to be that company.

Analysts expect earnings around $4 for the next two years. These numbers are down significantly from the original 2013 estimates. Any return of demand for natural gas drilling will instantly send this stock surging. With the Eagle Ford still looking for more crews, a return to more normal dry gas drilling would put C&J back into a very favorable position.

Conclusion

Any plunge in oil prices could be devastating for these companies, but the market appears to have already priced in such a scenario with the stocks. What investors aren't factoring in is a quick increase in natural gas prices such that has occurred over the last month. Both stocks could be strong gainers if natural gas contributes to demand going forward.

Disclaimer: Please consult your financial advisor before making any investment decisions.

Source: Following Up On Eagle Ford Shale Stocks