Rosetta Resources: Top Growth Company In The Eagle Ford Shale

| About: Noble Energy, (NBL)
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Rosetta Resources (NASDAQ:ROSE) is an oil and gas exploration and production company based in Houston, Texas, with a current market cap of $2.6 billion. While many companies saw significant gains in their stock price between the lows in March of 2009 and recent highs, ROSE enjoyed a gain of more than 1,500% from a close of $3.55 on March 9, 2009, to a close of $56.82 on July 25, 2011. ROSE has traded between $44 and $54 in 2012, and was just over $50 at the most recent close.

Rosetta has a primary focus in the Eagle Ford shale in southern Texas, which provided 78% of total company production in 2011. More than three-quarters of their 65,000 Eagle Ford acres are in the liquids-rich area, with a concentration in Webb and Dimmit counties, where 42 wells were completed in 2011 with a 100% success rate. The initial recovery rate estimate on the wells in this area was 0.7 million Boe (barrels of oil equivalent) per well. This estimate was raised to 1.2 million Boe in late 2010, and then raised again in 2011 to 1.7 million Boe, reflecting well performance more than double initial expectations.

In 2011, Rosetta's annual revenues increased more than 40%, net income increased more than 400%, and average daily production rose more than 20%. Total proved reserves more than doubled in 2011, while the liquids portion of those reserves increased from 40% to 54%. Long-term debt was reduced in 2011 by 34%. This oil focus and debt reduction was helped by Rosetta's timely sale of natural gas assets in Colorado and California for $255 million, coupled with an 85% capital spending focus on Eagle Ford oil operations.

In 2012, Rosetta plans to spend more than 90% of cap-ex on Eagle Ford oil operations, adding four rigs and completing an additional 60 wells, leading to an expected 40% increase in production, and a further increase in the portion of total production represented by oil.

Rosetta also has 300,000 acres in Montana where exploratory efforts have confirmed significant oil. This area is considered a westward analog of the Bakken and Three Forks plays in Montana and North Dakota. However, further operations in this area are largely on hold, as efforts in the Eagle Ford are currently more cost-effective.

ROSE has been a solid performer, outgaining both the S&P 500 Index and the S&P 400 E&P Index in each of the past three years. I believe that ROSE continues to present excellent potential for stock price appreciation going forward. Their debt reduction and commodity mix shifts from natural gas to the higher returns from oil have put them in position to accelerate their Eagle Ford expansion operations, which should lead to significant growth and a stronger balance sheet.

Considering that ROSE has a beta to the overall market of 2.2, and keeping in mind that the prices of both oil and natural gas continue to fluctuate, it is wise to choose a solid entry price. One might target a price in the bottom half of the 2012 trading range for a smaller starting position, then look to add to the position on the dips which have been fairly frequent in recent months.

Disclosure: I am long ROSE.