GeoResources: All bets are on
It’s not always easy to figure out which horses to back in the exploration and production sector as oil and gas prices remain at high levels. Analysts are trying hard to keep up with the wide array of companies, but have trouble covering all promising prospects.
One company that’s pulling ahead of the pack is GeoResources, Inc. (Nasdaq:GEOI). The small cap, which has properties in Wyoming, North Dakota, along the Gulf of Mexico and has targeted Oklahoma for expansion, was No. 31 on Fortune Small Business’s list of the 100 fastest-growing small companies last month.
It has other fans waiting in the stands. In June, GeoResources once again tapped into General Electric Co.’s (NYSE:GE) deep pockets when it partnered with GE Energy Financial Services to spend up to $90.5 million to acquire and develop new properties in Oklahoma. GeoResources and its predecessor companies have partnered with the GE unit twice before.
C.K. Cooper initiated coverage in February and subsequently upgraded its rating on July 1 to a “buy” earlier this month after the GE deal and a new operating report from the company. Analyst Joel Musante raised his NAV range for the firm to $20.91 to $23.12 per share, from $18.39 to $21.11, and raised the target price to $22 from $20.
In the Oklahoma deal, GeoResources functions as general partner with the GE unit and will boost its share of the income from the properties to 35% from an initial 2%, once capital costs are covered and certain hurdles reached. (GeoResources also directly acquired 18% of the Oklahoma properties.)
Commenting on the structure of the Oklahoma deal, Musante said, “This type of structure has been beneficial to GEOI in the past.” In one of the earlier deals with GE, GeoResources is the general partner where the two companies are developing Austin Chalk drilling opportunities in the Giddings Field in central Texas. Musante estimates the value of GeoResources’ general partnership interest in that venture to be around $35 million, or roughly $2 a share. In the new Oklahoma deal, Musante estimates the general partnership to be worth $15 million to GeoResources.
The company’s rise to prominence comes after its reverse merger in April 2007 with South Bay Oil & Gas LP and Chandler Energy LLC, and the subsequent acquisition of AROC Energy LP in October. The merged company has adopted a new strategy of “high-grading” its assets, or acquiring new assets with strong upside potential and low production costs, and divesting older assets with little upside potential and high production costs.
The company recently sold off mature assets in Texas and Louisiana for $13 million, and invested $12.8 million in the acquisition of its directly owned share of the new Oklahoma properties. The partnership with GE acquired the remaining 82% for $60.5 million and committed to spend $30 million to develop the properties.
GeoResources sold 1.5 million new shares in a private placement in June for $22.45 a share, yielding gross proceeds of $34.5 million. Net proceeds of $32.7 million were used to retire debt.
Cooper’s Musante calculated that the share sale and other changes would leave earnings estimates for 2008 and 2009 unchanged at $1.35 per share and $1.31 respectively. Cash flow per share, however, is now seen at $2.63 in 2008, instead of the original estimate of $2.75, and $2.59 in 2009, compared with the previous estimate of $2.75.
The stock price fell sharply after the private placement was announced, from its 52-week high of $29.08 on June 5 to $17.40 at Thursday’s close. The 52-week low was $5.60 last August. Current targets for the stock range between $22 to $27.50, for a mean target of $24.75.
GeoResources topped analysts’ earnings estimates for the first quarter ended March 31, posting $0.29 a share versus the average estimate of $0.24. For the second quarter ended June 30, the average estimate is $0.34. For the full year, the average estimate is $1.39, and for 2009, $1.78.
Musante, whose estimates are at the lower end of analysts’ expectations, concluded in his July 1 upgrade, “We think the recent weakness in share price provides an attractive opportunity for investors to initiate or add to an existing position in GEOI shares.”
In its June 26 operational update, GeoResources noted the successful completion of its second dual-lateral well in the Austin Chalk formation in Giddings Field, keeping its success rate at 100%. It has acquired more property there and counts on spudding a new well there every 60 to 75 days for the next three years.
The company also had good results from drilling in the Bakken shale play in North Dakota, where it partnered with Slawson Exploration, a private company. GeoResources, as part of its strategy, gets incremental production from “re-engineering” older assets to get more production or slow down the depletion rate.
In the race to find the next big oil source, odds are on GeoResources to be a winning bet.
