When a technological advance creates opportunity and a booming market, companies rush to take advantage. Think back to the 1990s when there was no shortage of companies looking to make money off of that new internet thing. Those of us that lived and traded through that time are only too aware that many of those that jumped on that particular bandwagon were ill equipped for the ride. They may have had a good idea, but often had no idea how to turn that into a profitable business. Being in the right place at the right time wasn’t enough.
The oil and gas industry in the US is, in many ways, at a similar point right now. The technology that has allowed extraction from geological formations that were previously unworkable has enabled a huge boom. Many people look at the companies associated with that boom and are fearful. They see rapidly rising stock prices and it brings back bad memories of frothy markets but, while it may feel the same, this story is different.
There are, as I see it, two fundamental differences. Firstly, the energy boom is based, not just on ideas and dreams, but on hard assets. These companies, in the form of mineral rights for various shale fields, own something of value and have the ability to turn those assets into cash. Secondly, and maybe more importantly, most of those involved are not new to the business world. They have been in the exploration and extraction game for a while and know that opportunity alone is not enough.
Abraxas Petroleum (AXAS) would be a case in point. They have only been listed on the NASDAQ exchange for 5 years, but have been in the business since 1977 and have enough experience to realize that, after the initial rush to be part of a boom, some rationalization is needed. To that end, Abraxas have spent the last couple of years divesting themselves of non-core assets and using the proceeds to reduce debt. With that has come a renewed focus on actually producing a saleable product and increasing margins rather than looking for the next big thing.
Their stock price has begun to reflect that in the last couple of months.
Abraxas Group (AXAS)
To those with “bubblephobia” this straight line increase is scary, but it is not the result of speculation. It is simply that, after a period of consolidation, Abraxas has set about the business of making money.
When you look at a chart like the one above it is natural to think that all of the value has gone from the stock, but in this case, by any normal metric, that isn’t so. AXAS has a forward P/E of 12.2, an earnings growth rate of 34%, an earnings yield of 8.2% and a growth to P/E ratio of 2.79, all according to VectorVest. In other words the stock price is still lagging behind the results and AXAS is cheap.
Earnings released this morning just reiterated that point. EPS of $0.07 per share represented significant growth from $0.02 for the same period last year and beat expectations of $0.06. Revenue also increased from $21.196 million to $25.893 million. Much of that improvement is down to decreasing the debt burden, but Abraxas has also shifted production away from gas and towards the more profitable oil. Oil has moved from 51% of their production at the beginning of 2012 to 68% at the end of last year.
In short, then, investing in AXAS is not about buying into the latest frothy trend. It is about buying into an experienced company that, after some trial and error, has settled on a formula for making money that works. They now have a solid balance sheet, good margins and a base from which to continue growing. They may be in a booming sector, but my optimism about the stock is based purely on fundamentals, not froth.