3 High Growth Picks In Independent Oil & Gas

Includes: CVX, DNR, EOG, OAS, XOM
by: Dividendinvestr

By Renee O'Farrell

When it comes to the oil and gas industry, big names like Exxon Mobil (NYSE:XOM) get a lot of attention, but that doesn't necessarily mean bigger is better. We like Exxon (read our take on the company here), but sometimes choosing smaller, independent companies in the oil and gas industry is a better bet. One big difference is that opportunity for earnings growth is greater. For instance, Exxon's earnings are expected to increase by an average rate of 7.59% over the next five years while Chevron (NYSE:CVX)'s earnings are expected to increase by just 5.12% per annum on average over that period. Are these bad stocks? Not at all, but I can think of three companies that are priced nearly as low relative to their future earnings, yet have earnings growth estimates of 23% or higher.

Denbury Resources (NYSE:DNR) has a market cap of $6.01 billion. It recently traded at $15.13 a share, which is just 8.69 times its forward earnings. Analysts are expecting Denbury Resources' earnings to increase by an average rate of 23.08% a year over the next five years. Consensus estimates put the company's one-year price target at a mean of $25.91 a share. If they are right, investors buying in today would earn upwards of 70% on their investment in Denbury Resources. I think those figures are reasonable. While Denbury did just lower its 2012 production estimate as a result of recent asset sales, the company also bought a Texas oilfield for $360 million in early May. Jeffrey Altman's Owl Creek Asset Management and Leon Cooperman's Omega Advisors both owned positions in the company valued at more than $55 million at the end of 2011.

EOG Resources (NYSE:EOG) is a $26.24 billion market cap company. It is currently going for $97.17 a share and has a forward price to earnings ratio of 14.98. Consensus estimates put EOG Resources' earnings growing at a rate of 35.72% a year on average over the next five years. Analysts, on average, give EOG Resources a one-year target estimate of $127.62 a share, over 31% above its current trade price. Ric Dillon's Diamond Hill Capital had a stake in EOG Resources worth roughly $165 million at the end of the fourth quarter while Richard Chilton's Chilton Investment Company had more than $100 million invested in the company at the end of 2011. In the case of EOG Resources, I like the way this company is managed. It has a history of saving money then reinvesting it in plays that will benefit the company over the long term.

Oasis Petroleum (NYSE:OAS) has a $2.33 billion market cap. It is priced at $25.07 a share or 9.43 times its forward earnings. Analysts expect Oasis Petroleum's earnings to increase by 26.67% a year on average over the next five years. Consensus estimates put the company at $39 a share in the next year, making for an expected upside of roughly 56%. Both Donald Chiboucis' Columbus Circle Investors and Richard Driehaus' Driehaus Capital increased their stakes in Oasis Petroleum during the fourth quarter by more than 50%. This company has some issues with debt management but its record of earnings growth, net income growth and revenue growth just can't be ignored. Even if analysts are off the mark, investors should still realize above market returns.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.