Rosetta Resources - Continued Growth In The Eagle Ford Shale

| About: Rosetta Resources (ROSE)

I first wrote about Rosetta Resources (NASDAQ:ROSE) a few months ago in this article, outlining the company's 1,500% rise in stock price from 2009, production growth, and strategy for continued growth. Rosetta has continued its growth through efficient implementation of the strategy I described, and recently posted another impressive quarter. However, due to some large swings in the price of oil over the past few months, ROSE experienced some wide fluctuations in stock price.

Rosetta's second-quarter report boasted a 25% year-over-year increase in total production, led by a 61% increase in liquids production. This was a 6% increase over the prior quarter's production in the Eagle Ford shale, which drives 96% of Rosetta's total production; however, it was a 1% decrease from the prior quarter's total production due to a sale of natural gas assets (part of Rosetta's long-term strategy). Net income per share was triple that of the second quarter of 2011, although a large portion was a gain from hedging, which doesn't count towards adjusted net income. Revenues were 77% higher than in the second quarter of 2011.

The growth strategy I described previously involves Rosetta selling lower-return natural gas assets, and investing the money in expanding higher-return oil production activities in the Eagle Ford shale. The sale of the company's Lobo and Olmos properties in South Texas contributed $95 million. This helped Rosetta drill an additional 20 oil wells in the second quarter with a 100% success rate, bringing the total to 91 completed wells in the Eagle Ford. Another 16 wells are planned to be completed in the third quarter. Rosetta estimates that an additional 356 wells can be completed on its existing Eagle Ford acreage. Liquids production now accounts for 59% of total company production, up from 46% one year ago and 52% last quarter, and contributes 83% of revenue, up from 60% one year ago.

Stock Price Performance

Like many oil companies, ROSE's stock price fell considerably during the second quarter as oil prices dropped from over $100 per barrel to under $80 per barrel. The trading range for the first quarter had been $44 to $54, but in the second quarter, ROSE dropped as low as $33. Since then the stock has recovered, touching $45 on Friday. My previous article (written at the end of April), while bullish on ROSE, cautioned about buying at the then-current price of $50, instead suggesting a starter position near the bottom of the first quarter trading range, then adding to the position on the dips that were frequent with this high-beta stock. Sure enough, nine days later, ROSE had dropped to $42, and traded between $40 and $42 for the rest of May. If one had followed the article's suggestion and started a position at this price, then added as the article suggested on the dip to $36 in early June, and added again on the dip to $33 in late June, the average price would be around $37. That position could be sold today for a gain of 20% in three months.

The trading range for 2012 is now $33 to $54, and the current price for ROSE is once again a bit north of the midpoint of that range. A similar buying strategy may be wise going forward.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ROSE over the next 72 hours.

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