A Look At 4 Small Cap Shale Plays

Includes: CRZO, HK, NOG, TPLM
by: Mark Yagalla

With the major players in each of the different shale plays getting all the attention, it's worthwhile to look at the small cap space to see if there's any golden nuggets or black coal. Some of these small caps have taken on too much debt and their stock price has been depressed. Others are in the right shale play, but in the wrong zone or in an area of the shale where none of the majors have ventured yet. The purpose of this article is to look at these 4 stocks and see how investors should position themselves.

Halcon Resources Corporation (NYSE:HK)

Halcon Resources is an independent onshore oil and gas company. The company's principal resource plays include:

  • 128,000 net acres in the Bakken/Three Forks Formations in North Dakota and Montana

  • 198,000 net acres in the Woodbine/Eagle Ford Formations in Texas

  • 125,000 net acres in the Utica/Point Pleasant Formations in Ohio and Pennsylvania

At the end of last year, the company had proven reserves of approximately 108.8 million barrels of oil equivalent.

The biggest problem with Halcon is that it's total debt load is greater than its current market cap. The company has $2.51 billion in debt and a current market cap of only $2.29 billion. The stock is down almost 35% in the past year. However, analysts that follow the stock have price targets north of its current trading price. Price targets on the stock range from $8 to $14 with $10 being the median target. In terms of recommendations, 5 have it rated as a Strong Buy, 10 a Buy, and 4 a Hold.

Recently Ken Griffin's Citadel Investments increased its stake in Halcon to over 18 million shares. On the May 8th episode of Mad Money, Jim Cramer said he likes the stock, but it's a speculative play.

Northern Oil & Gas, Inc. (NYSEMKT:NOG)

Northern Oil & Gas is one of my favorites in 5 Undervalued Bakken Plays. On May 6th Northern released its first quarter results and here are the highlights:

  • First quarter 2013 production of one million barrels of oil equivalent ("Boe"), or 11,115 average Boe per day; an increase of approximately 30% when compared to first quarter of 2012.

  • Oil and gas sales, including the impact of settled derivatives, increased 38% to $82.8 million, as compared to the first quarter of 2012.

  • Northern added 128 gross (9.6 net) wells to production during the first quarter of 2013.

  • Northern's first quarter 2013 Adjusted Net Income was $18.1 million, or $0.29 per diluted share, a 25% increase compared to the first quarter of 2012.

  • During the first quarter of 2013, Northern participated in 128 gross (9.6 net) wells that were completed and placed into production. As a result, Northern's producing wells totaled 1,355 gross (115.8 net) as of March 31, 2013. In addition to these wells, Northern was participating in 152 gross (12.2 net) wells drilling or awaiting completion at March 31, 2013.

Northern in my opinion is cheap. The stock trades at 1.4 times book and has a PEG ratio of 0.27. Of the analysts that follow the stock, 3 have it rated as a Strong Buy, 5 a Buy, 4 a Hold and 1 an Underperform. Price targets on the stock are higher than the current trading price and range from $14 to $26 with $20 being the median target.

Carrizo Oil & Gas Inc. (NASDAQ:CRZO)

Carrizo Oil & Gas, Inc. is a Houston-based energy company actively engaged in the exploration, development, exploitation, and production of oil and natural gas. The company has acreage in the following formations:

  • 46,000 net acres in the Eagle Ford Shale in South Texas

  • 37,000 net acres in the Niobrara Shale in NE Colorado

  • 12,500 net acres in the Barnett Shale around Arlington, Texas

  • 100,600 net acres in the Marcellus Shale

Highlights from the company's first quarter earnings report include:

  • Record Oil Production of 9,311 Bbls/d, a 57% increase over the first quarter of 2012.

  • Natural Gas and NGL Production of 103,722 Mcfe/d.

  • Record Total Production of 2,394 MBoe, or 26,600 Boe/d.

  • Record Revenue of $111.9 million, or adjusted revenue of $118.2 million, including the impact of realized hedges, a 4% sequential increase over the fourth quarter of 2012 and a 39% increase over the first quarter of 2012.

  • Record EBITDA (as defined below) of $93.3 million, a 33% increase over the first quarter of 2012.

Carrizo has a current market cap of $1.1 billion. The stock trades at a forward P/E of 10.38 and has a PEG ratio of 0.43. Over the past year, the stock is down just over 7%. Of the analysts that follow the stock, 7 have it rated as a Strong Buy, 3 a Buy, 6 a Hold, and 1 an Underperform. Price targets on the stock range from $21 to $40 with $30 being the median target. Billionaire Ken Griffin's Citadel Investments just disclosed that they have a 4.65% stake, or 1,871,454 shares.

Triangle Petroleum Corporation (NYSEMKT:TPLM)

Triangle Petroleum is focused on the Bakken and Three Forks formations in the Williston Basin in North Dakota and Montana. The company holds approximately 86,000 net acres in McKenzie and Williams counties in North Dakota and Roosevelt and Sheridan counties in Montana. The company also holds approximately 413,000 net acres in the Windsor Block in Nova Scotia. Triangle Petroleum also owns RockPile Energy Services which provides hydraulic fracturing services to Triangle Petroleum and third-party operators in the Williston Basin.

Triangle Petroleum has a current market cap of $319.04 million. The stock trades at a forward P/E of 6.03 and has a PEG ratio of 0.27. On the balance sheet there's $39.09 million in cash to $148.02 million in debt. Book value per share is $4.31.

My biggest problem with Triangle is that RockPile as wholly-owned subsidiary is a distraction and confusing management. They are not able to tell their story clearly and quite honestly it seems that the company is growing so fast that management can't keep up. When President & CEO Jonathan Samuels was asked about how income at RockPile will be treated where it has an nonoperating interest in a third-party well, his response was:

I was given a really sophisticated answer. And I didn't really understand it, to be honest. It's complicated. Essentially, the total amount of income has to exceed Triangle's total cost to develop a well or something like that. So we had a 10% working interest, and it was a $10 million well, and so our cost was $1 million. RockPile could recognize any income from that well over $1 million. So that will go to the full cost pool. I might have just gotten that completely wrong. I'm not an accountant. I think the simpler way to guide you is that we do not foresee a scenario in which that's going to happen. So I was just unlikely to recognize any income, would be the simple model point. That changes. If we pick up work in area where we have a big non-op interest, we'll certainly communicate that, I tried, Ron, I couldn't figure it out.

The other problem I have with Triangle is that it was a first-mover on its acreage in Montana. This region of the basin is largely undeveloped. Triangle has said that they plan to let other operators develop their own properties before Triangle deploys its own capital. The value of this acreage is not yet proven.


My 2 favorites for investors are Carrizo Oil & Gas and Northern Oil & Gas and I rate them both as a Buy. Triangle and Halcon are both a Hold in my opinion. Triangle needs to give a clearer picture going forward and Halcon has to trim its debt levels.

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

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