7 Reasons Why This $2 Oil Stock Is Too Cheap To Ignore

| About: Warren Resources, (WRES)
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Warren Resources, Inc. (NASDAQ:WRES) is a high-potential oil and gas company that is developing reserves and production in Wyoming, California, Texas, North Dakota, and New Mexico. This stock has been unfairly punished by the markets due to a recent plunge in commodity prices and oil stocks, and it now trades for just over $2 per share. There are a number of macro and company-specific reasons why the current sell-off could be a excellent buying opportunity for investors:

1. A Bargain: Warren Resources looks undervalued based on almost every metric. It trades below book value, which is $2.51 per share. The price to earnings multiple is just about 6, while the average stock in the S&P 500 Index trades for about 13 times. When comparing Kodiak Oil & Gas Corp. (NYSE:KOG) shares to Warren Resources, it also confirms the upside potential that this stock offers. For example, Kodiak is expected to post earnings of about 52 cents this year, and it trades for over $8 per share. Warren Resources is expected to earn almost that same amount, around 46 cents per share, but not until next year. It is not a perfect comparison, however, when you consider that Kodiak shares trade for almost 4 times the price of Warren shares, it shows the type of upside the stock has going forward. Comparing the price to earnings ratio shows that Kodiak trades for about 16 times earnings and Warren is at just about 6 times earnings.

2. Growth Potential: Analysts expect earnings to jump about 40%, rising from around 32 cents per share this year to 46 cents in 2013. Future growth could accelerate as the company continues to develop projects in areas like Green River Basin in Wyoming. The company has a positive outlook for increased production going forward and it recently stated:

Although we had water injection permitting issues in 2011, we met the challenge and, during the first quarter of 2012, we received 7 new water injection permits in California. With additional 2012 drilling of oil producers and water injectors, we believe that Warren should see significant increases in production for this and the future years.

3. Short-Squeeze Rally Potential: According to data from shortsqueeze.com, there are currently about 2.45 million shares short. Based on average daily volume of around 370,000 shares, it could take nearly seven days' worth of trading volume for shorts to cover. Having this level of short interest in the stock could actually be bullish, since it indicates many shares need to be bought by shorts. If this company announces good news on reserves, production or other positives, shorts could be caught off guard and decide, or even be forced, to cover their positions. The short argument appears to be based on hopes of a big drop in the price of oil, and a weak stock market. Shorts were right to short this stock when it was trading near the 52-week high of $5.74, but at just over $2, it's an entirely different risk/reward level. Oil is off the highs of 2012, which was just over $100 per barrel, but it is still showing relative strength at nearly $90 per barrel. At just over $2 per share, Warren Resources could gap up, thanks to many shorts who need to cover sooner or later.

4. Takeover Or Asset Sale Potential: Many corporate balance sheets are flush with cash that is earning little or nothing for shareholders. Plus, interest rates are at record lows, which means using debt to acquire a company is very inexpensive. There has been a recent trend for asset sales and takeovers in the oil sector, as many companies are taking advantage of cheap valuations to go on a buying spree. Recently, Harvest Natural Resources announced it would be selling Latin American assets for about $725 million, which caused the stock to roughly double in value. China's Cnooc Ltd. also recently announced it would buy Nexen (NXY), a Canadian energy company, for about $15.1 billion. More buyouts and asset sales are likely in the second half, and while it's impossible to know which companies could benefit, picking stocks that are significantly undervalued increases the chances.

5. Exposure - The Good Kind: This is a high-potential stock because it has exposure to the oil-rich Green River Formation, which is estimated to have between 750 billion barrels of recoverable oil. Warren Resources has projects in the Washakie Basin in Carbon County, Wyoming, which is part of the Green River Formation.

6. Insider Ownership: Insiders, including directors and officers, own nearly 5 million shares of stock in this company, which means that management is aligned with shareholders' interests.

7. Outperform Rating: The average analyst price target is $4.65 per share with an outperform rating. That would give investors who buy now, returns that would just about double their money.

Key Data Points For Warren Resources From Yahoo Finance:
Current Share Price: $2.26
52-Week Range: $2.08 to $5.74
Dividend: none
2012 Earnings Estimate: 32 cents per share
2013 Earnings Estimate: 46 cents per share
P/E Ratio: about 6 times earnings

Key Data Points For Kodiak Oil & Gas From Yahoo Finance:
Current Share Price: $8.30
52-Week Range: $2.43 to $10.90
Dividend: none
2012 Earnings Estimate: 52 cents per share
2013 Earnings Estimate: $1 per share
P/E Ratio: about 16 times earnings

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

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