The harsh reality is that our nation cannot survive without oil and natural gas. Alternatives such as wind, solar and geothermal are all potential sources of energy, but for the moment they are not viable, cost effective or scalable enough to replace king oil. For the time being, our dependence on black gold is growing and even though natural gas prices are at lows, prices are getting some support here and should rise over the long term. President Obama also vowed to open a good part of our soil to oil and gas drilling operations which is where GeoResources may stand to profit.
Company Description & Developments GeoResources is an independent oil and gas company that is in the business of acquiring and developing land through different programs; from purchasing existing reserves to re-engineering, development and even good ole’ fashioned exploration. This mix allows stability in their low risk inventory, while exploring upside in and around existing fields and new formations.
Their business is focused in the Southwest and Gulf Coast along with the Williston Basin. They also have growing leaseholds and operations in the Bakken and Eagle Ford formations.
60% of their reserves (and revenue) are currently in oil and the balance in natural gas.
The key to their success will be the strong margins they are enjoying with elevated oil prices, which are expected to stay around the $100 mark or greater, especially if US economic health is indeed improving.
On the natural gas side, they can improve profitability if natural gas prices rebound here. But even with depressed natural gas prices, their overall profit margins look good.
- Over the past five years, gross margin peaked at 77.1% and averaged 70.6%. Operating margin peaked at 35.1% and averaged 24.1%. Net margin peaked at 29.8% and averaged 18.2%.
- TTM gross margin is 73.7%, 310 basis points better than the five-year average. TTM operating margin is 39.6%, 1,550 basis points better than the five-year average. TTM net margin is 25.5%, 730 basis points better than the five-year average.
Recently, GeoResources successfully completed drilling its fourth Eagle Ford well at a cost of 3 million. They noted that they were able to significantly reduce drilling costs and time on this well and indicated this to be the trend moving forward on average.
They expect to spud (start) between 21 and 24 gross wells at Eagle Ford alone in 2012, which should net about 9 producing wells. All of which contributing to profitability if they can be drilled efficiently and if oil prices remain stable. Obviously, GEOI intends to spark more growth outside Eagle Ford as well.
Financial Profile GeoResources is a small-cap (822 billion) company that is trading at about 26 times trailing earnings (P/E). Looking forward, Zacks Consensus Estimates are calling for that number to drop closer to 16 with no change in price over the next year.
GeoResources jumped from a Zacks Rank 3 to Rank 1 on the 10th of January and has been between a 1 and 2 before its recent upgrade to a strong buy on Jan 31st.
The oil and gas company reported a quarterly sales increase of 20% at their last earnings report. Annual sales were up 38% compared to 2010 with total sales of roughly 107 million in FY2010. GEOI earnings declined about 5% year over year when they reported Q32011 a couple months ago. GeoResources is expected to earn $1.33 in FY2011 according to the Zacks Consensus Estimate.
Earnings Estimates Analysts have been all over the board with their revisions over the past 30 days, but the majority are moving estimates higher for the coming quarters as well as FY2011 and FY2012. Predicting oil prices and producing wells can be a daunting task for any analyst and these mixed revisions are common on smaller drillers like GEOI. GeoResources will report Q42011 results on March 13th.
Expectations are for GeoResources to generate $0.37 in income this quarter. Of the 14 analysts who cover GEOI, the consensus is for the company to grow earnings by 6% in the current year (FY2011) and roughly 49% in FY2012.
In terms of the magnitude of analyst estimate trends, we are seeing most of the consensus estimates higher than they were 90 days ago for Q22012 out to FY2012. The consensus for Q42011 earnings is flat compared to estimates 90 days ago.
GeoResources beat estimates last quarter by 9.09% and by almost 7% in the quarter before. The stock did miss by 21% in final quarter of 2010.
Market Performance & Technicals Before we look at performance, it’s important to note the lower volume of GEOI. This lack of heavy trading can cause slippage in the shares when you are buying or selling, so use caution.
Aside from the volume, GEOI has more than doubled in value since mid-October when it hit a low of almost $14. GeoResources’ meteoric rise from that level certainly makes it a momentum stock. Recently, we have seen some consolidation and a breakout from the $31 mark, which I would look to for support and a buy level.
The stock remains above its 50 and 200 day moving averages of $28.88 and $24.75 respectively.
While the trend remains bullish, there might be a short term pullback in the cards as the stock is a bit overbought there. GEOI has exceeded the S&P 500’s performance by over 9% in the past year and over 6% in the past month. All in all it was a very volatile year for GEOI.
Jared A Levy is the Momentum Stock Strategist for Zacks.com. He is also the Editor in charge of the market-beating Zacks Whisper Trader Service.
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