More than 90 years after the first commercial oil well began
operating in the Permian Basin of west Texas and southeastern New
Mexico, oil companies continue to set up shop there looking to
strike it rich.
One of those companies,Rosetta Resources (
), made its big move into the Permian a few months ago with its
buyout of assets fromComstock Resources (
Rosetta is an independent exploration and production company
that does all of its work in Texas. Just more than half of its
revenue comes from oil, with most of the rest coming from the
production of natural gas and natural gas liquids.
In May, the company closed its $768 million acquisition of
more than 53,000 net acres from Comstock. That deal not only gave
Rosetta exposure to the Permian Basin. It also helped the company
reduce its reliance on the Eagle Ford shale, another Texas oil
and gas play located in the southern part of the Lone Star
Most of the acres Rosetta bought from Comstock are in the
oil-rich Delaware Basin portion of the Permian Basin.
Progress In The Permian
Rosetta didn't waste any time getting its Permian properties
up and running. During the second quarter it operated four rigs
in the Permian, drilled 10 vertical wells and completed an
additional nine vertical wells.
On a second-quarter conference call with analysts, Rosetta
Chief Executive James Craddock said the company expected to drill
about 15 operated wells in the third quarter and complete 12
"The Permian acquisition is part of our ongoing strategic
focus to pursue new growth opportunities and expand our inventory
of repeatable liquids-rich projects," Craddock said. (Rosetta
officials did not respond to requests from IBD for additional
In addition to vertical drilling, which involves drilling
straight down into the ground for oil and gas, the Permian also
offers opportunities for horizontal drilling.
Horizontal drilling -- often associated with hydraulic
fracturing or "fracking" -- involves drilling at an angle to
fracture rock formations. Thanks to new technologies, this
process is much less expensive and more cost effective than it
was as recently as a decade ago.
Rosetta plans to employ both horizontal and vertical drilling
in the Permian.
"The acres are very well positioned to give them multiple
years of production and reserve growth," said Irene Haas, analyst
at Wunderlich Securities, which has done business with Rosetta
during the past year.
The Permian opportunity should ease concerns about the price
Rosetta paid for the Comstock assets. Wall Street's first
reaction was negative following Rosetta's initial announcement in
March, mainly because $768 million is a pretty big piece of
change for a company with $614 million in 2012 revenue.
Rosetta's share price fell 6% to 46.95 by the third trading
day immediately following the announcement. However, the stock
has since rebounded, touching a two-year high of 58.02 on
Comstock Paying Off?
Company watchers sound confident that the investment will more
than pay for itself over the long term. In a note following
Rosetta's Q2 earnings report, analyst Mike Kelly of Global Hunter
Securities said the upside potential of the Comstock assets
He points to the strong early performances of Rosetta's
horizontal wells in the Permian, which exceeded the company's
"This has driven Rosetta to accelerate its horizontal
development plans," Kelly noted.
In addition, other exploration and production companies have
had success drilling in the Permian's Delaware Basin,
includingAnadarko Petroleum (
),Concho Resources (
) andClayton Williams Energy (
"We like that part of the Delaware Basin, and Comstock
actually spent some money drilling vertical wells there, which
sort of de-risked the deal for Rosetta," analyst Haas said. "In
this market you have to pay a fair price, and at this time you
can't find a lot of deals. The value add will be when they start
converting the acres into multi-layer horizontal play."
This means Rosetta will be able to drill more than one well at
a time, she says. "You can drill three or four wells
horizontally, so there's a lot of efficiency gained because you
can extract a lot more oil and gas."
Financially, Rosetta has been on a strong run of late, with 12
straight quarters of double-digit revenue growth. It has posted
double-digit or better earnings increases in nine of the last 10
Second-quarter profit rose 52% from the prior year to 88 cents
a share, though that was below analyst estimates for 97 cents.
Sales climbed 19% to $236.5 million, topping views for $217.3
On the downside, Kelly noted that the Eagle Ford operations
"disappointed" during the quarter, with total production flat
quarter to quarter and oil production down 2% quarter to
But Kelly gave an upbeat outlook for the remainder of the
year, saying that "weak Eagle Ford oil production is not in the
cards for the second half of 2013 like it was in the first
Analysts polled by Thomson Reuters expect Rosetta to post Q3
earnings of 90 cents a share vs. 76 cents the previous year.
Full-year EPS is seen rising 40% to $3.88.