With the price of crude surging, it’s been a good year to be an exploration company. Stone Energy Corporation (SGY) is expected to grow earnings by 92% in 2011. So why is this Zacks Rank #2 (buy) so cheap at just 6.6x forward estimates?
Stone Energy is an independent oil and natural gas exploration company with operations in the Gulf of Mexico, onshore Louisiana and the Appalachia region. The company uses acquisitions and exploration to increase its production volumes.
Wells in West Virginia Flow Tested
On Dec 19, Stone announced that 11 wells in its Mary field in Wetzel County, West Virginia all flow tested into the Caiman pipeline. This is in the potentially lucrative Marcellus Shale play.
Another 13 wells in the Mary field have been drilled but are not yet completed. They are expected to be fractured and produced during 2012.
Stone has added about 10,000 net acres to its West Virginia leasehold in the second half of 2011.
Stone Beat By 15.4% in the Third Quarter
On Nov 1, Stone reported its third quarter results and surprised on the Zacks Consensus for the 4th quarter in a row. Earnings per share were 90 cents compared to the consensus of 78 cents. The company made just 40 cents in the year ago period.
The quarter was boosted by a positive price differential for Louisiana Sweet Crude to West Texas Intermediate. This provided incremental margins of over $20 per barrel during the third quarter.
Net daily production rose to 34.2 thousand barrels of oil equivalent (MBoe) per day compared with 33 MBoe per day in the third quarter of last year. The oil/natural gas split was 52% v. 48%.
Average prices realized soared to $103.51 per barrel of oil compared to $72.52 last year. Natural gas average prices declined slightly to $5.17 per mcf of natural gas versus $5.48 last year.
Zacks Consensus Estimates Rise
Analysts are bullish on the remainder of 2011. The 2011 Zacks Consensus Estimate rose 6 cents to $3.89 in the last month. That is earnings growth of 92% as the company only made $2.02 last year.
However, the analysts see some weakening in 2012. Although the Zacks Consensus has risen to $3.38 from $3.33 per share in the last 30 days that is an earnings decline of 12.9%.
Stone is a Value Stock
Shares are well off their early 2011 highs. In fact, they got smoked in the summer and have staged a rebound.
But Stone is still cheap. Its forward P/E of just 6.6 is well under its peers who are averaging 14.8.
It also has a price-to-book of 1.9. A P/B ratio under 3.0 usually indicates a company is undervalued.
Additionally, Stone has a stellar 1-year return on equity (ROE) of 32.1%. Its peers average a ROE of just 11.2%.
Stone is a play on all the things happening in U.S. drilling. Its investment in the Marcellus Shale play appears poised to take off in 2012. And at 6.6x forward estimates, it definitely fits the value criteria.
This Week’s Value Zacks Rank Buy Stocks
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It is too risky to buy the banks right now? Banco Latinoamericano de Comercio Exterior, S.A. (BLX) is a specialty bank that has been bucking the trend as it has grown its portfolio and its deposit balance. But because of global banking fears, this Zacks #1 Rank (strong buy) trades with a low forward P/E of just 7.8. Read the full article.
Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Turnaround Trader and Insider Trader services. You can follow her on twitter at traceyryniec.
