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Rosetta Resources Sees Permian Oil Fueling Growth

By: Investor's Business Daily
Posted: 10/7/2013 1:02:00 PM
Referenced Stocks: APC;CRK;CWEI;CXO;ROSE

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 ( ROSE ), made its big move into the Permian a few months ago with its buyout of assets fromComstock Resources ( CRK ).

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 State.

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 operated wells.

"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 comment.)

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 Friday.

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 "appears immense."

He points to the strong early performances of Rosetta's horizontal wells in the Permian, which exceeded the company's expectations.

"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 ( APC ),Concho Resources ( CXO ) andClayton Williams Energy ( CWEI ).

"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 quarters.

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 million.

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 quarter.

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 half."

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.