Warren Resources (NASDAQ:WRES) is a small cap energy producer I have traded in and out of successfully over the past 12-18 months. It is a highly volatile stock, but its long-term prospects, I believe, are substantial. Recently, it has had some positive catalysts that I think will lead the stock price higher, and I am back into this fast growing energy play, awaiting the next earnings report on November 7.
Positive news/catalysts for WRES:
- Consensus earnings estimates for both FY2012 and FY2013 have risen significantly over the last month after moving down incrementally in the previous couple of months.
- Natural gas (NYSEMKT:NG) prices are up more than 50% since I last wrote about the company's prospects in early June, when the shares were trading at about $2. The company only has 10% of production in NG, but has significant gas reserves in Wyoming and just acquired additional NG production and reserves (see next point).
- It has successfully completed a strategic acquisition of some NG and midstream assets from Anadarko Petroleum (NYSE:APC).
Warren Resources is an independent energy company with oil and natural gas production. The company focuses primarily on its waterflood oil recovery programs and horizontal drilling in the Wilmington field within the Los Angeles Basin of California; and on the exploration and development of coalbed methane properties located in the Rocky Mountain region .
Six additional reasons WRES is a good speculative play at under $3 a share:
- Warren Resources has grown its operating cash flow by more than 250% over the last three years.
- The company has grown revenues at better than a 10% annual clip over the past five years. Revenue growth for both FY2012 and FY2013 looks like it will be in the 15% to 17% range, and it has a five-year projected PEG of near 1 (1.02).
- WRES is selling near the bottom of its five-year valuation range based on P/E, P/S and P/CF.
- 90% of the company's production is oil & liquids, it has raised oil production by a 22% CAGR over the last six years, and it targets 60% to 100% returns on new wells.
- The three analysts that cover the stock have price targets ranging from $4 to $5.25 a share on the stock -- significantly higher than the current stock price.
- The company has beat earnings estimates five of the last six quarters, and the stock sells at just over 9x forward earnings, a steep discount to its five-year average (17.7).
Disclosure: I am long WRES. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.