Even after energy's long rally, investors can still strike it rich if they know where to drill.
As the crowd continues to eye giant players such as
-- both clear winners for the year -- some industry veterans are digging deeper for even better finds. And they are coming up with names like
Bois d'Arc Energy
, which just went public in May, as well as
( GMXR) and
Pathfinder Capital Advisors happens to like -- and own -- all three. Months ago, in fact, principal Harry Chernoff told
GMX and Abraxas were poised for a jump. The stocks have gone on to rocket 150% and 40%, respectively, since he first mentioned their names.
Today, Chernoff believes the companies still have room to run. And he has now added Bois d'Arc, along with its 47% owner,
, to his list of favorites.
Chernoff feels that Bois d'Arc, which takes its name from a tree native to central Oklahoma and the lower Mississippi valley, will attract some attention when it reports second-quarter earnings in August. He believes the stock could potentially double in price over the next two years. Meanwhile, he portrays Comstock as an attractive opportunity for growth and value investors alike.
He does note, however, that energy prices must remain strong for the stocks to hit his targets. Bois d'Arc rose 4 cents to $14.99 on Thursday. Comstock rose 71 cents to $27.37.
Bois d'Arc has attracted other fans already. This summer, analysts at three firms -- Raymond James, Johnson Rice and Hibernia Southcoast Capital -- began formally recommending the stock.
Wayne Andrews of Raymond James, which served as the book runner on Bois d'Arc's initial public offering, cites a number of reasons for his strong buy recommendation. While new to the stock market, he notes, Bois d'Arc boasts an impressive track record that stretches back for years. For example, he says, the company enjoys a five-year success rate of 75% for exploration wells drilled in the Gulf of Mexico region where it operates. In contrast, he says, the industry posts a success rate of closer to 60% there.
For exploration and development wells combined, he says, Bois d'Arc's success rate rises to 83% over the past five years, 86% over the past two and even higher recently.
"In the first four months of 2005," he notes, "the company drilled eight wells -- all of which were successful."
Chernoff agrees that Bois d'Arc is enjoying a "hot streak" right now.
"It has hit eight of eight wells, four of which were exploratory wells risked at no better than 50% likelihood of success and two of which were high-risk deep exploratory wells," Chernoff says. "This drilling success has already replaced more than 100% of 2005 production."
If Bois d'Arc can go on to achieve even its estimated success rate for the rest of the year, he adds, the company will replace some 300% to 400% of its production.
Andrews attributes Bois d'Arc's achievements to far more than just luck. He points out that the company employs seasoned management and technical teams whose members boast an average of 24 years worth of experience. And those leaders, he says, rely on a "rigorous and comprehensive" development strategy -- based heavily on the use of 3-D seismic data -- for the projects they ultimately decide to pursue.
They have plenty of work to choose from. Right now, Andrews says, the company has some 48 exploration and 24 development prospects in its portfolio. Moreover, he says, the company can exercise considerable control over which projects it pursues -- and how it does so -- because it operates nearly all of the properties it owns.
That operational control has enabled Bois d'Arc to lower its expenses and, thus, leave more cash for future projects. And thanks to its recent IPO -- which raised enough money to pay off all outstanding debt -- the company can plow virtually of its funds into exploration and production.
"Bois d'Arc is one of only three companies (in Raymond James' small-cap E&P coverage universe) that is completely free of long-term debt," Andrews says. "We believe that the company's strong balance sheet and management's commitment to fiscal discipline will be rewarded by investors."
For now, however, Chernoff feels that investors have yet to "connect the dots" in the impressive Bois d'Arc story. He concedes that several Bois d'Arc metrics -- such as enterprise value, reserve ratios, production levels, revenues and margin -- remain in line with the group. But he says that Bois d'Arc's exploration program, funded entirely with cash flow from operations, should enable the company to double its reserves -- and thus its market value -- in just two short years.
"In short, Bois d'Arc is a moderate-risk, high-return exploration opportunity that is trading as if it had nothing more than its existing reserves on the books," Chernoff says. "Its historic exploration success (albeit with a subpar 2004 caused by Hurricane Ivan), its excellent 2005 success, its 100% cash-flow funding and its very strong risk-adjusted drilling prospects for 2005-2006 get no credit in the value of the stock."
Still, Bois d'Arc executives are clear believers. Together, CEO Wayne Laufer and President Gary Blackie own nearly one-quarter of the company's stock.
Currently, Andrews has a 12-month price target of $18 on the shares but suggests that further upside is likely.
Chernoff finds Comstock to be an underappreciated investment as well. He describes Comstock as a "typical Texas-Louisiana exploration and production company" featuring low-risk natural gas properties, that's set apart by its 47% stake in Bois d'Arc. Moreover, he remains bullish on Comstock even after taking into account a recent dry hole that hurt the company's stock.
For now, Chernoff says, Comstock remains difficult for regular investors to value. In the second quarter, he explains, the company's results will be muddied by the effects of a recent acquisition and the new accounting it uses for its Bois d'Arc investment. But after another quarter or two, he says, the value of Comstock will become quite clear.
For Chernoff, it already has. Excluding its 47% stake in Bois d'Arc, he says, Comstock is currently trading at an enterprise value of less than $1.70 per million cubic feet of gas equivalent -- or half that of its comparable peers and "easily the lowest valuation of any publicly traded company with 100% conventional North American oil and gas assets." Comstock's big stake in Bois d'Arc, Chernoff believes, makes the stock even more attractive.
"Since Bois d'Arc is an undervalued growth stock and Comstock net of Bois d'Arc is an undervalued value stock, Comstock offers an excellent short-term and long-term opportunity to play the oil and gas equities market for both growth and value," Chernoff says.
Chernoff and his partners at Pathfinder have already established long positions in the stock. Meanwhile, Comstock executives continue to hold on to their own shares. By now, more than four months have passed since the last insider cashed out.
Meanwhile, two of Pathfinders' older energy picks continue to deliver.
This year, Chernoff says, GMX has enjoyed a perfect drilling record and is in the process off adding three times as many net wells as it did in 2004. At the same time, he says, the company has maintained highly competitive finding and development costs. Thus, he expects the stock to move higher even after its big jump this year.
Analysts have certainly taken notice of the company.
Late last month, Eric Hagen of First Albany initiated coverage of GMX with a strong buy rating and a $19 target price that he recently raised to $20 a share. Hagen likes the "prolific" east Texas area where the company operates, noting that nearby fields have produced a number of valuable wells that typically enjoy reserve lives of 15 to 30 years and generate rates of return of 55% on the basis of $6 gas prices. Moreover, he says, GMX itself recently added a new rig in east Texas -- bringing its total to three -- and, as a result, could add as many as 10 net wells by the end of 2005. All told, he says, GMX should increase its annual production by some 76% this year.
Hagen throws in another bonus as well.
GMX is a "potential acquisition target," he says. It "is surrounded by numerous larger players with an appetite for lower-risk development drilling."
He points to several candidates, including Oklahoma City neighbor
, as possible buyers.
GMX inched up 16 cents to $17.79 on Monday.
Abraxas is another Pathfinder pick that has stirred up some analyst attention. To Brian Samuels of C.K. Cooper -- who this month began recommending the stock -- Abraxas clearly stands out from the pack.
"We are currently witnessing froth in a host of E&P issues that, quite honestly, lack fundamentals," writes Samuels, whose firm has no banking relationship with Abraxas but plans to pursue one in the future. "Investors should concentrate on E&P companies growing daily production and reserves. Abraxas is doing both."
Early this year, Samuels notes, Abraxas carried out a major asset sale that left it with the funds necessary to ramp up its drilling program. As a result, he says, the company was able to spend nearly as much on drilling in the first quarter of 2005 as it did in all of 2004. All told, he says, the company expects to spend $22 million -- up from $9.3 million in 2004 -- to drill and complete a dozen wells this year.
Meanwhile, Chernoff points out that Abraxas has some attractive new acreage to work with. Specifically, he says, the company recently disclosed in a conference call that its new property in west Texas could prove to be especially productive, yielding between 100 and 300 billion cubic feet of natural gas equivalent -- compared with the company's reserves of about 100 Bcfe total -- at a very affordable cost.
"If the company can, in fact, add 100 to 300 Bcfe at 50 cents to $1 per mcfe, then -- everything being equal -- the valuation of the company would likely double or triple from its current level," he says.
Abraxas was flat Thursday at $4.22.