For those who are unaware, each month there is a joint web chat for subscribers of The Energy Strategist (TES) and MLP Profits. The chat is conducted by Igor Greenwald, managing editor for TES and chief investment strategist for MLP Profits, and myself. This month's chat took place on Sept. 10.
We place a priority on answering questions about portfolio holdings and recommendations during the chat, but often we get questions about companies we don't currently recommend. Or, we sometimes get questions or comments about a company that require an extended answer. In these cases we push those questions to the end, and attempt to answer them if time allows. For this past chat there were several questions remaining at the end, which I will address here today. For each company, a brief background is presented for readers who may not be familiar with the company.
Q: What is your view of BCEI at the present price?
Bonanza Creek Energy (NYSE: BCEI) is a Denver-based oil and gas company with operations in Colorado and southern Arkansas. While the Bakken Formation in North Dakota and the Eagle Ford Shale in Texas get more press, oil and gas plays in the Denver-Julesburg Basin have helped turn Colorado into one of the fastest growing energy producing states in the country and the fastest growing oil producer in the Rocky Mountains. Since 2008 oil production in Colorado has risen by an impressive 63 percent to a 50-year high.
BCEI is well-positioned with acreage in the Wattenberg Gas Field north of Denver. The field is one of the largest natural gas plays in the US. Wattenberg represents 60 percent of BCEI's proved reserves, with 59 percent of those reserves classified as liquid. Of the company's remaining reserves, 39 percent are located in the oil-bearing Cotton Valley Sands in Southern Arkansas (68 percent liquids) and 1 percent in Colorado's North Park Basin (100 percent liquids).
BCEI has grown reserves at a 45 percent compound annual growth rate (CAGR) since 2007, while production has grown at a 71 percent CAGR. In the most recent quarter, production was 55 percent higher than in 2012, and production in the Rocky Mountain region was 105 percent higher. This followed a first quarter that actually disappointed on production and EBITDA, and saw the company take a 10 percent hit to its market cap. But shares have since recovered, and are trading at an all-time high, which represents a 238 percent increase in the share price since the 2011 IPO.
Bonanza Creek's incredible growth rate continues to justify the premium valuation. Nevertheless, with the share price up 21 percent in the past month and major flooding in Colorado potentially affecting Q3 operations, you will likely find a better entry point over the next two to three months.
Q: What do you think of the latest Peyto results?
Peyto Exploration & Development (TSX: PEY) is a Canadian producer of natural gas. Its production had been on the decline for several years until 2009, when Peyto joined the fracking revolution and began to use hydraulic fracturing on horizontal wells. Since then, the fortunes of the company have made a sharp reversal along with the production rate. After declining from 2005 to 2009, Peyto's share price has risen 230 percent since the beginning of 2009.
In the most recent quarter, Peyto reported a year-over-year production increase of 41 percent to a new company record of 58,145 barrels of oil equivalent per day. The sharp recovery in natural gas prices also helped, propelling the company's funds from operations 70 percent higher to $110 million Canadian dollars.
So, to answer the question, the quarterly results were superb, and continued the pattern of strong growth the company has shown since 2009. But strong production growth is only a part of the company's story. They have also done a fantastic job of controlling costs. Peyto should be on anyone's short list if they are looking to invest in natural gas, and are looking for diversification beyond the US.
Q: Would like your opinion on TAT
TransAtlantic Petroleum (NYSE: TAT, TSX: TNP) is a small energy company with interests in Turkey (primarily) and Bulgaria. There are untold numbers of small, publicly-traded energy companies operating in different regions of the world, but TAT has a story worth telling.
When people suggest to me that the world won't produce much more oil or gas than is currently produced, my counterargument is that the fracking revolution that has made the US the fastest growing oil and gas-producing country in the world has yet to spread across the globe. It was less than a month ago that Poland became the first European country with a significant hydraulic fracturing success, producing commercial quantities of shale gas.
TransAtlantic Petroleum seeks to bring the fracking revolution to Turkey. (Bulgaria has banned fracking.) In fact, TAT has begun to hydraulically fracture wells in Turkey's Thrace Basin. In the ideal scenario, TAT, which has seen its share price languish for years, would see the sort of renaissance experienced by Peyto once they began their program of hydraulic fracturing.
But it's far too early to tell if TAT will have commercial success, and it faces significant competitors in the region, such as Shell (NYSE: RDS.A). Given all the risk factors, this is not one that I would feel comfortable owning at this time, but if it were to significantly increase production in Turkey as Peyto did in Canada, I might reconsider.
Q: Can you comment on the prospects for Devon Energy?
Devon Energy (NYSE: DVN) is one of the major oil and gas producers in North America. Historically the company has produced more natural gas than oil -- at present producing more than 3 percent of the natural gas consumed in North America -- but Devon is now focused on producing more liquids. At present these make up only about a third of the output, but the company anticipates pushing that to 50 percent by 2016 and is devoting substantial capital to that goal.
The market has richly rewarded Chesapeake Energy (NYSE: CHK) for shifting production from natural gas to liquids -- that stock is up 31 percent since joining The Energy Strategist's Aggressive Portfolio four months ago.
But investors have so far taken a wait-and-see approach with Devon. This is somewhat understandable since Devon's total production of oil and gas is about where it was 10 years ago.
Having said that, the recovery of natural gas prices since last year pushed Devon's second-quarter earnings to $1.69 a share versus $1.16 a year ago. Oil production increased 14 percent over the previous year. The market's response to date has been tepid; shares are up less than 5 percent since the earnings release six weeks ago.
But Devon looks like a real value to me at this level, and I would exercise a bit more patience if you are holding it. I have been tempted in the past to buy a few shares, and I don't think they have looked like a bigger value than they do today.
Q: Please comment on LRE and MEMP
I am going to address LRR Energy LP (NYSE: LRE) and Memorial Production Partners LP (NASDAQ: MEMP) in an upcoming issue of MLP Investing Insider.