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Small Driller Rivals Exxon: Under the Radar

Shares of China North East Petroleum have climbed 452% in a year and have room to grow thanks to profit margins that are better than those of larger rivals.
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NEW YORK (TheStreet) -- Shares of China North East Petroleum (NEP) - Get Report climbed 452% during the past year, and they could keep rising thanks to profit margins that outstrip those of Exxon Mobil (XOM) - Get Report and Chevron (CVX) - Get Report.

China North is a non-state-owned oil producer listed on the NYSE Amex. Despite the stock's strong performance, it remains a relative unknown on Wall Street. Just one firm,

Rodman & Renshaw

(RODM) - Get Report

, covers the company, rating its stock "market outperform" with an $11 price target.

Third-quarter profit decreased 18% to $4.1 million and earnings per share tumbled 29% to 17 cents, hurt by a larger float. Revenue dropped 24% to $14 million. However, the low-cost driller's profit spreads continued to improve. Its gross margin widened from 52% to 81%, and its operating margin rose from 47% to 54%. Here's a look at China North's quarterly net margin and those of bigger peers.

Net Profit Margin

China North East Petroleum : 28%

Chevron : 8.9%

Exxon Mobil : 6.5%

Royal Dutch Shell : 4.3%

ConocoPhillips : 4.1%

China North benefits from 20-year lease agreements with

TheStreet Recommends

PetroChina

(PTR) - Get Report

, the mainland's largest producer, which purchases all oil extracted from the Jilin Qian'an oilfield. China North has leasing rights at three other oilfields in Jilin province, and completed its acquisition of

Song Yuan Tiancheng Drilling Engineering

, an oilfield services specialist, in October.

The subsidiary recently inked a contract with PetroChina to drill 25 wells before June 2010. And management has expressed interest in further acquisitions. There are a handful of smaller, privately-held drillers in Jilin that would bolster growth with minimal balance sheet damage. China North possesses ample liquidity, with $33 million of cash and $12 million of debt.

China North's stock has soared 84% during the past three months. Still, shares are cheap relative to those of oil and gas peers based on all of our metrics. Here is a snapshot of the stock's valuation.

Price/Earnings: 12.2 versus an industry average of 20

Price/Projected Earnings: 7.9 versus an industry average of 14

Price/Book: 3.0 versus an industry average of 3.4

Price/Sales: 4.8 versus an industry average of 10

Price/Cash Flow: 6.8 versus an industry average of 7.9

Though the energy market's outlook remains murky, investors weighing the sector should consider China North. It offers ideal geographic exposure and short-term growth catalysts. The stock has fallen 14% from a 52-week high recorded on Jan. 6. A beta value of 2.6 indicates that the shares magnify market swings.

-- Reported by Jake Lynch in Boston.