Falling oil prices have made this oil driller a bargain, yet Wall Street is forecasting triple-digit growth for the company.
Emerald Oil (EOX)
from The Energy Strategist
Small-cap Bakken driller Emerald Oil (EOX) was already dirt-cheap at $3.30 a share, priced near the value of the crude likely to be extracted from the few wells it had already drilled as of the end of last year.
Now, after a further decline of 20%, the stock is pricing in refinancing difficulties for a company with no debt due until 2019, modest interest costs and sufficient liquidity to finance all of next year’s capital spending.
Emerald delivered as expected on its third-quarter earnings report, not that that mattered with crude crashing below $80 a barrel.
The company remains on track to double last year’s production in 2014 and is projecting an output increase of at least 35% in 2015. That’s factoring in plans to drop one of its three rigs in March unless crude prices have recovered by then.
Even at the reduced drilling pace that would follow, Emerald expects to end up with 85% of its Bakken acreage held by production by the end of 2015, and 100% three months after that. At that point it will be free to resume drilling the most promising locations first. The entirety of the company’s $225 million drilling budget for next year can be covered from cash on hand and an untapped $200 million credit line that’s likely to increase to $250 million by year’s end.
In other words, Emerald doesn’t need to sell equity or raise debt to keep converting its Bakken turf into bankable reserves and rising cash flow from operations. It just needs the price of crude to stabilize north of $70 a barrel, which would sustain its development but not the costlier offshore projects that remain essential to meeting long-term global demand.
The opportunity to pick up shares here well below liquidation value is ripe for aggressive bargain hunters with a stomach for near-term losses. We’re making Emerald the #11 Best Buy to underscore our conviction. Buy EOX below $4.50.
Robert Rapier & Igor Greenwald, The Energy Strategist, www.energystrategist.com, 800-832-2330, November 4, 2014