Why You Should Buy Marathon Oil & Small Cap Stocks

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WTI Crude oil has gone up down between around $80 per barrel to a high $110, but it has strategy to plateau at around the current $86 price. However, oil-price net has a $99 per barrel 1-year target. With this in mind, you may want to consider buying exploration & production companies that are taking advantage of the current environment through buying undervalued targets. In this article, I review 3 oil & gas stocks with a focus on growth prospects and strategic alternatives (i.e. the buying and selling of assets).

Why You Should Buy Marathon Oil (NYSE: MRO)

After recovering 35% from the 52-week low, Marathon Oil is starting to see many of its bears rethink their outlooks.  In mid-November, Howard Weil selected the company as one of its "focus stocks" with a $39 price target. Deutsche Bank, in an early December report, is similarly bullish with a "buy" rating and a $40 price target. This represents around 30% upside from the current market assessment. Return on invested capital of 11.3% is also strong, but analysts expect EPS growth to trend below the exploration & production industry's 7.7% rate. 

There are several other reasons why you should be optimistic about Marathon. First, management recently implemented a $5.2 billion capital budget for next year, which could generate a "surprise" against earnings expectations. Management guided for the budget to drive as much as an 8% y-o-y rise in production--65% of which will come from domestic liquids-rich plays and one-third of which will target Eagle Ford. Fortunately, results have already been improving in the Eagle Ford, in addition to Bakken. The former is currently running at 60,000 barrels of oil equivalent per day (boe/d) and is targeting 85,000 boe/d by 2013. If anything, the company should allocate more resources in these shale plays through selling off oil sands operations. Divesting 20% of the Athabasca Oil Sands project would add substantially to the expected $1.5 - $3 billion in asset sales between 2011 and 2013. I am further optimistic about the company's intent on exploring the Boyla oilfied and still maintain a JV agreement with Conoco and Lundin--a strategy that mitigates risks.

Though management is downsizing operations at Eagle Ford through reducing rigs and planning to sell ~100,000 net acres in undeveloped Eagle Ford, the CEO has expressed that production will still remain steady. Efficiency has improved substantially, so the number of wells drilled won't go down.

Small Cap Roundup: Synergy Resources (NYSEMKT: SYRG) & Triangle Petroleum (NYSEMKT: TPLM)

If you are seeking outperformance, you should consider buying stock in small cap companies. Oil & gas firms are often buyout targets, because the industry allows for economies of scale--providing large margins for those that integrate well. Synergy Resources and Triangle Petroleum are two companies you should consider buying.

Synergy operates in Colorado and targets the Wattenberg field in the D-J basin. In just the last half year, the stock has appreciated by around 50% from rising production. I further like the company's strategy of increasing scale through takeover activity. It recently acquired Orr Energy assets to 36 oil & gas wells in its target field for $42 million. The drilled and undrilled leases cross 3,196 net acres and is proximal to wells of other producers that have suggested a high oil ratio. The credit line was recently expanded to $47 million, which will help finance an improved growth curve.

And Triangle Petroleum has a very favorable outlook on the Street. It is focused on E&P activity in the Bakken and Three Forks formations of the Williston Basin. Analysts forecast the company growing EPS by 35% annually over the next 5 years. Assuming expectations are met, 2016 EPS will come out to $1.38. At a multiple of 12x, this translates to a future stock value of $16.56. Discounting backwards by 10% yields a present value of $10.28. This is at around a 70% premium to the current market assessment. A recent "buy" rating buy Wunderlich has a $10 price target on the firm. It is for this reason that I strongly recommend buying now.

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