3 Attractive Bakken Plays
Bret is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As West Texas Intermediate oil prices continue their upward march to $110 a barrel, its seems appropriate to look at some energy plays that should continue to benefit from higher oil prices as well as increasing production levels. Today let's focus on some fast growing E & P concerns in the Bakken shale region which has gone from producing just over 100,000 barrels of oil/day to over 700,000 barrels of oil/day over the last five or six years.
Below are a large-cap, mid-cap and small-cap producer that are showing impressive production growth in the Bakken, and are priced at attractive valuations.
Continental Resources (NYSE: CLR) is the largest producer and leaseholder in the Bakken. During its last earnings report, it revealed that production was growing more than 40% year over year, and that over 70% of overall production now consists of oil.
Analysts expect just under 50% revenue growth for all of FY2013. They also project approximately 30% sales increases in FY2014, which is the average annual revenue growth Continental has turned in over the past five years.
Just as importantly, the company grew proven reserves by more than 50% in 2012, which is a replacement rate oil majors like Exxon Mobil & ConocoPhillips would love to be able to achieve.
Despite this past, current and projected growth; the shares are trading for less than 14 times 2014’s projected earnings, and the stock has a five-year projected PEG of 0.52.
For investors who believe in the long-term production growth of the Bakken, the largest player in the region makes a logical proxy. The stock has had some negative sentiment recently due to the pending divorce of the company's founder and CEO, but this is likely to be a temporary headwind and should be resolved in the near future.
With the stock selling in the bottom half of its five-year valuation range based on P/E, P/S, and P/CF, investors are being granted a good entry point to build a position.
Oasis Petroleum (NYSE: OAS) is a mid-cap E&P concern with over 335,000 net acres in the middle of the Bakken. The reason a growth investor wants to own Oasis is the huge increase in production the company has brought on line in the last few years. Production has grown at a better-than-70% annual rate over the last three years. Even better, proven reserves have increased at an even faster rate, and oil now composes over 90% of overall production.
The company is tracking toward better-than-50% sales gains this year and the stock has a minuscule five-year projected PEG (0.48). Oasis is a cash flow machine and trailing-12-month operating cash flow is approximately 10 times that of FY2010. Given the company’s production and reserve growth, the stock is selling at a very reasonable 12.5 times 2014’s projected earnings.
Emerald Oil (NYSEMKT: EOX) is my small-cap Bakken pick. The company has a less-than-$200 million market capitalization. The company is posting small losses currently, with an expected loss of $0.07 a share this fiscal year. However, Emerald is projected to post a profit of better than $0.30 a share in FY 2014. It should be noted that the company has already been operating cash flow-positive in three of its last four reported quarters.
Emerald is experiencing massive production growth with revenues projected to increase more than 90% in both FY2013 & FY2014. Oil now constitutes over 90% of overall production as well. Unusual for an E&P concern, the company has net cash on its balance sheet which represents more than 10% of its overall market capitalization. Finally, out of the three picks profiled it has greatest possibility of being acquired for its prime Bakken assets given its small market capitalization.
To summarize, energy production in the Bakken shale region has experienced exponential growth over the last half decade. This growth is projected to continue in the immediate future. Despite this growth, there are myriad Bakken focused E & P concerns that sell at attractive valuations and should reward savvy investors who pick up shares at these price levels.
Bret Jensen owns shares of Oasis Petroleum. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!