This Undervalued Energy Stock Is As Close As It Gets To A 'Sure Thing'

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A big part of my job as managing editor of StreetAuthority involves talking with our premium newsletter experts to get a sense of what they like in the market, where they think it's headed and how they plan to help their followers profit.

That means I get paid to hear from some of the top investing minds in the country on a regular basis. What could be better?

I want to share some of that wisdom. I'm featuring insights and top picks from each of our experts over the next couple of weeks as a way of saying thanks for being a StreetAuthority.com reader.

Today's pick comes courtesy of Dave Forest.

A trained geologist, Dave Forest has worked in the mining and oil and gas sectors for more than a decade, traveling as far as Russia, Myanmar and Madagascar to inspect natural resource projects. Starting this month, Dave takes over as Chief Stock Market Strategist for StreetAuthority's Junior Resource Advisor and Scarcity & Real Wealth newsletters. Dave has been involved in a number of mining and oil company ventures and consultancies, including a position as chief operating officer for Condoto Platinum (ASX: CPD) , an Australian company with operations in Colombia, and as director of Notela Resource Advisors, a natural resources advisory firm. Dave previously managed the energy research division at Casey Research. For his market-beating pick for this issue of Insider, the newest StreetAuthority expert went underground.

Here's more from Dave:

The Market is Undervaluing This Energy Stock
I think Energy XXI (Nasdaq: EXXI) is as close as it gets to a sure thing to beat the market during the rest of 2013.

Here's why I'm so certain...

Dave Forest

My thesis in oil and gas investing is simple: the junior firms that are best at growing reserves in a fiscally sound manner are the ones who get bought out at fat premiums by replacement-hungry majors. And Energy XXI has some of the best reserves metrics I've seen in a long while.

I look for evidence that a company is using development cash wisely. Each dollar you spend on acquisitions, drilling and completions better create more than a dollar of reserve value. Energy XXI excels on this front -- during the past fiscal year the company spent $1 billion and added $1.8 billion in proved reserves.

When each dollar spent is creating more than $1.80 in value, you know you've got a company making the right moves.

Despite these stellar numbers, Energy XXI's share price has fallen nearly 30% over the past year.

What's the market missing?

I believe investors have been unsettled by the company's oil output -- which has fallen slightly from its peak in mid-2012.

But the reserves numbers show me that's going to change.

The company recently started widespread horizontal drilling at its properties in the Gulf of Mexico. The program was so successful that production swelled quickly.

The thing with "horizontals" is they pump hard when they start production, but then decline relatively quickly (albeit from a much higher initial level than for conventional wells). This is the drop the market is fretting over.

But once horizontals stabilize (as Energy XXI's crop is now doing -- based on three consecutive quarters without a major decline), they pump stronger for longer. That's the hidden story in Energy XXI's surging reserves growth -- the company's horizontal wells are going to be steadily tapping a lot of valuable oil, for a long time.

Looking below the ground, it's clear this is a company growing in value -- the kind of growth that's the real driver for share-price appreciation.




The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Commodities

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