8 Oil and Gas Stocks With Continued Upside: Part III

by: Michael Filloon

As the third installment of small oil and gas stocks with upside, this article addresses companies with a market cap between 300 and 800 million. I am only covering specific names that I believe have continued upside. So if there are any names you feel should be on the list and are not, please email me and I will check them out. The reccurring theme will be bullish domestic unconventional oil.

GMX Resources (GMXR)
has several significant oil and gas plays in the United States. Its Haynesville/Bossier play has 44032 net acres and there are 261 horizontal locations there. Cotton Valley has 46651 net acres and 100 - 251 horizontal locations. The Bakken location consists of 26087 net acres and 81 possible locations. The Niobrara acquisition is 40643 net acres and 254 horizontal locations.

GMX has made some very good acquisitions, although the company was a little late getting into oil leases. In the Bakken, one rig will run starting in September of this year. A second rig will be added sometime in late fourth quarter of 2011 or early 2012. One rig will begin work in August of this year, in the Niobrara. One rig is running in the Haynesville acreage. GMX has stated it will produce 473000 BBls of oil and natural gas liquids in 2011 and more than double this production in 2012. GMX believes it can increase liquids revenue from 18% of total revenue in 2011 to 33% in 2012. In all, GMX has a multi-year inventory from four interesting resource plays. The Bakken and Niobrara offers 668 possible locations that are 90% oil. Three of its four Flexrig3s will be drilling for oil in 2012. For more info on FlexRig3s, check out Helmerich & Payne's FlexRigs Provide an Opportunity in U.S. Shale Plays.

Look for GMX to continue to increase oil production, which should continue to provide growth in the long term. My only worry is how late the company has been to the oil party, and the cost involved in acquiring acreage. Other companies that purchased acres in the Eagle Ford, Bakken, Niobrara and Permian have already begun extensive plans for production increases.

  • P/E Ratio- Negative

  • Price to Sales- 1.61

  • Price to Tangible Book- 2.6

Warren Resources Inc. (NASDAQ:WRES) has good long term growth possibilities. I had this one wrong when I wrote Warren Warren Resources Looks Poised for Growth; a recent earnings miss has created investor value. Some 80% of Warren's revenue is from oil. Its compound annual growth rate in oil production has been 59% over the past 6 years. Warren has proved reserves of 10.8 MMBO and 71 BCF as of the end of 2009. As of the third quarter of 2010, net production was 5150 BOE/d.

Warren's Wilmington Oil Field in California is the third largest in the United States. Warren estimates it will be able to recover up to 300 MMBO through waterfloods (EIA estimate). The Wilmington Field economics at $80 NYMEX is 237%. Warren also has 65790 net acres in the Washakie Basin. Warren has a joint venture with Anadarko (NYSE:APC) at this location. Warren has an average working interest of 42%. This coal bed methane play has low cost production due to shallow drilling. Each well has an estimate to produce 1.0 Bcf and there is a possibility of 1800 gross wells. Most of the upside for Warren is its 80000 net acres in the Niobrara. Warren will drill one exploratory well in 2011. This company's technical ability is also impressive. It uses new drilling techniques in concert with state of the art software and geophysical tools. I think the recent pullback is a buying opportunity.

  • P/E Ratio- 17

  • Price to Sales- 3.6

  • Price to Tangible Book- 2.12

FX Energy Inc. (NASDAQ:FXEN) is one of the few natural gas producers to make this list. Although I am not bullish on United States natural gas, European natural gas is another story. FX has leaseholds in Poland. It has 25 licenses covering 3.8 million acres. These acres are prospective for conventional drilling. There are several other large oil and gas players in the area:

  • ConocoPhillips (NYSE:COP)
  • Marathon (NYSE:MRO)

  • Chevron (NYSE:CVX)

  • ExxonMobil (NYSE:XOM)

  • Talisman Energy (NYSE:TLM)

Polish natural gas has better economics than natural gas in the United States for several reasons:

  • Lower Taxes

  • Lower Royalties

  • Two-Thirds Natural Gas Imported (Higher Prices)

Poland is excited to increase production to reduce its reliance on Russian natural gas. A pipeline is currently being built there, and production is expected to ramp up significantly upon completion.
FX also has 10418 net acres in the Cut Bank oil field. Rosetta Resources (NASDAQ:ROSE) and Newfield (NYSE:NFX) currently have wells drilled in the vicinity. This company's Alberta Bakken area is in Northern Montana near the Canadian border. FX is working on another play that would net it a third of 100000 gross acres in the southern portion of the Alberta Bakken.

  • P/E Ratio- Negative

  • Price to Sales- 10.67

  • Price to Tangible Book- 11.68

Abraxas Petroleum Corp. (NASDAQ:AXAS) drills for oil and gas in some of the best unconventional plays in the United States. It currently has over 50000 net acres in these oil plays. Abraxas has a pro forma net asset value per share figured on reserves:

  • $2.69/share- Proved Reserves

  • $15.19/share- Proved/Probable Reserves

  • $28.14/share- Proved/Probable/Possible Reserves

Abraxas has a diverse set of acreages. The names and net acres are:

  • Bakken/Three Forks- 20853 Net Acres

  • Niobrara- 18700 Net Acres

  • Alberta Bakken- 10000 Net Acres

  • Pekisko Fairway- 9120 Net Acres

  • Texas Oil Plays- 8700 Net Acres

  • Eagle Ford Shale- 8333 Net Acres

Abraxas will focus capital expenditures on Texas conventional oil wells and unconventional Bakken/Three Forks wells in 2011. Its 8700 net acres in Texas has 65 net unrisked locations. The 20835 net Bakken acres has 98 net unrisked locations. The Bakken net unrisked locations are figured using 6 wells per 1280 acres. Brigham (BEXP) has been having success using 8 wells per 1280 acres. It is not unconceivable that Abraxas will be able to increase to 8 as well.

Abraxas is planning to drill 2.5 net operated wells and .5 net non-operated wells this year in the Bakken. The Abraxas' Eagle Ford play has 52 net JV drilling locations. Four wells are planned here in 2011. In Texas, it is planning to drill 12 wells in the first half of this year. There will be one well drilled in the Niobrara in 2011. Although no drilling will be done in the Alberta Bakken, Abraxas is planning to purchase more acres this year. All total, $60 million will be spent in 2011 for development of oil properties. This company hopes cap ex spending will increase oil production to a 50-50 mix of liquids and gas.

  • P/E Ratio- 276

  • Price to Sales- 5.88

  • Price to Tangible Book- N/A

REX Energy Corporation (NASDAQ:REXX) has a large inventory of locations. Its Appalachian area has 57000 net acres in the Marcellus Shale Fairway. Some 61% of this is in the liquids rich play. This has a total non-proven resource potential of 1.4 to 2.0 Tcfe. REX's Niobrara holdings may have the most upside. REX has 45000 net acres and 100% of this is in the oil window of the D-J Basin. This acreage has a total non-proven resource potential of 17.4 to 30.5 MMBoe. REX also has tertiary recovery oil projects in Illinois. Its total non-proven resource potential of 24.2 to 60.6 MMBbls from ASP flooding in the Lawrence Field.

REX plans for 2011 to be a big year. The company estimates 2011 production growth of 71% to 95% over 2010. REX's historical reserve growth has a CAGR of 75%. It is dedicating 74% of its cap ex on oil and liquids projects. Sixty-five percent of the Appalachian budget will go to Butler County, which is liquids rich.

The Appalachian acres will provide the bulk of production for REX. In 2010, REX drilled 10.5 net wells in Butler County. In 2011, it will drill 15 more wells at this location. REX's non-operated position in Appalachia saw 4.4 net wells get drilled in 2010. Estimates have another 8 net wells being completed in 2011. Although this area has very good well economics, the Niobrara could provide a more significant upside.

  • P/E Ratio- 83.3

  • Price to Sales- 8.65

  • Price to Tangible Book- 1.99

PetroQuest Energy (NYSE:PQ) is a balanced oil and gas producer. This company's chart looks good over the past three months. PetroQuest has a 28% CAGR over the past twelve years with respect to production growth. The twelve year CAGR on reserve growth is 25%. As of the end of 2010, this company has had a success rate of 94%. PetroQuest has 45000 net acres in the Woodford shale, and 16000 net acres in the Fayetteville shale. The Arkoma Basin has been kind to PetroQuest. Since 2005 it has seen a CAGR of 41% with reserves and 33% with production. PetroQuest has 1600 net acres in the Eagle Ford. Three gross wells will be drilled here in 2011 and PetroQuest is aggressively seeking more acreage. Twelve percent of the 2011 capital budget is being spent here. In east Texas, PetroQuest's 23900 net acres are in SE Carthage field. A total of seven gross operated wells will be planned for this year. PetroQuest is increasing its exposure to liquids. In 2010, PetroQuest had liquids production of 21% of the total. This was 10% better than in 2009, and 2011 should see production growth of an addition 10%. PetroQuest also has shallow water assets in the Gulf of Mexico. Going forward, the Woodford JV will continue to produce liquidity, while the Niobrara and Eagle Ford add significant upside, depending on well results.

  • P/E Ratio- 13.9

  • Price to Sales- 2.86

  • Price to Tangible Book- 2.23

Magnum Hunter Resources Corporation (MHR) has done quite well since September. Since the implementation of new management, Magnum has become a much better looking company. Currently, Magnum has interests in the Appalachian Basin, Eagle Ford and Bakken. The 2011 cap ex has three parts. The largest amount of $65.1 million or 43% is going to the Eagle Ford. Appalachia has two parts, as $59.9 million or 40% is going to oil and gas production and $25 million or 17% is being spent on its midstream business.

Since new management took over in the second quarter of 2009 Magnum has increased production over 2000%. The Eagle Ford is one of the hottest shales in the United States. Magnum has 25074 net acres here. This acreage has the possibility of 100 locations. These locations are in the oil window. Triad Magnum assets are also important. These assets included reserves, acreage, pipeline, and infrastructure. These reserves also include the Marcellus shale.

Magnum Hunter also has Williston Basin assets in North Dakota. It has 43% interest in 15000 gross acres. Magnum is also planning secondary oil efforts at this location. The Nuloch acquisition adds another 31200 net acres in Divide and Burke Counties. Nuloch also adds another 38700 net acres in Saskatchewan and 50680 net acres in Alberta. NGAS was also acquired and added 300000 net acres in the Appalachian Basin. For a more in depth article check out Magnum's Recent Deals Provide Upside Going Forward. In summary, Magnum looks good on paper. The company has obtained some very good assets for what I think is a very good deal. We will have to see if Magnum can get these assets producing cash flow.

  • P/E Ratio- Negative

  • Price to Sales- 14.09

  • Price to Tangible Book- 5.29

GeoResources Inc. (NASDAQ:GEOI) is a pure value play, and one of the stocks whose assets I really like. I do not own this stock now, but think the stock is cheap considering the properties it holds. GeoResources has acreages in the Eagle Ford and Bakken/Three Forks. It has 45000 net acres in the Bakken and 23000 net acres in the Eagle Ford. GeoResources is continually adding positions in both plays. It has 24 Mmboe proved reserves, with 60% coming from oil. Last year, it averaged 5090 Boe/d. Total net acreage is 235572. Breaking down the acreage into a percentage we see:

  • Gulf Coast/East Texas-34%

  • Williston Basin- 32%

  • Louisiana- 16%

  • Permian- 9%

  • Mid-Continent- 6%

  • Other- 3%

Another area of significance is the Austin Chalk where GeoResources has 29000 net acres. For 2011, cap ex was recently increased from $88 million to $114 million, with 2012 at $173 million. In summary, it is hard not to like this company. See GeoResources: A Play on Eagle Ford and Bakken Shales, for a more in depth article on this company. GeoResources is inexpensive at its current valuation.

  • P/E Ratio- 26.8

  • Price to Sales- 4.38

  • Price to Tangible Book- 2.2

There are several good names to pick from here. I am focusing on oil in the short to intermediate term as valuations continue to favor oil over gas. Natural gas supplies continue to meet demand. Oil continues to see political and social pressures. Until the story changes, follow the trend. This is the third in an installment of oil and gas production names that have continued upside. To see two prior articles on names with lower market caps go here and here.

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

Sources: Warren Resources, GeoResources, GMX Resources, PetroQuest, Magnum Hunter, FX Energy, Abraxas Petroleum, REX Energy.

Disclaimer: This is not a recommendation to buy, but a list of oil and gas companies with similar valuations I believe have upside in the long term. I generally trade several stocks and will list stocks I own or may buy in the short term. Please carefully study the names after reading this to get a good idea of whether the company should be purchased.