Natural Gas for Growth

06/20/2003 12:00 am EST

Focus:

Tobin Smith

Founder and Chief Research Analyst, NBT Equity Group

Even Alan Greenspan is now concerned about the high price of natural gas. Tobin Smith, editor of ChangeWave Investing. "The key to doubling or tripling your money during the natural gas crisis of 2003-2004 is to find natural gas exploration firms that are technology leaders. The natural gas crisis (and $6 mcf prices) is as inevitable for the next few years as death and taxes. Our plays gush cash above the $4 mcf levels." Here are his latest natural gas growth picks.

"Our original play in the natural gas exploration space is still the cream of the mid-cap explorers--Chesapeake Energy (CHK NYSE). It's been a nice winner and should close the year above $22. They have the management, the technology, and growing production of natural gas. Chesapeake has interests in nearly 11,000 producing wells in the mid-continent region of the United States and in Texas, New Mexico, Montana, and North Dakota, and the company increased its proved reserves by 24% during 2002. I'm moving the buy under to $12 to make sure you get a start in this high-class winner.

"Our newest growth gas-related play is Meridian Resources (TMR NYSE), an independent oil and natural gas company that explores, acquires, and develops properties utilizing 3-D seismic technology. Company operations are focused on the onshore oil and gas regions in south Louisiana, the Texas Gulf Coast, and some deep offshore areas in the Gulf of Mexico. In the span of about one year they have gone from talk of bankruptcy to a real cash cow. The bad news ended this year, management got back to basics and the market paid nearly no attention when TMR acquired their big Biloxi site, which has been a gusher. Management seems to have learned their lesson and how to find shallow-water gas. We like shallow water because the risk is much lower than deep-water drilling. Bottom line: This is one undervalued energy company. At a normal six times cash flow, this is a $8 to $10 stock early next year. I recommend buying Meridian Resources under $5.

"Our other new growth recommendation is Magnum Hunter (MHR NYSE), an independent energy company that specializes in lower-risk in-fill drilling exploration and development of gas properties with a geographic focus in the Mid-Continent region, the Permian Basin, and the Gulf of Mexico/Gulf Coast. The company has identified more than 358 development drilling locations. Revenues for the first quarter rose by 86% to $80.1 million. Magnum is a great example of how management can screw up a company by having too much debt at the wrong time, as they pre-sold most of their gas supply into the futures market for 2003 at prices under $4 per mcf--or about $2 less than they should be getting. Nevertheless, recent discoveries in the Gulf of Mexico will start to bear fruit in the third quarter of this year and that output will not be hedged. They have had nothing but good news on their new drilling in the Gulf so far this year and are on track to double cash flow in 2004. Magnum Hunter is a buy under $9 with a goal of reaching a target of $18-$20 per share in 2004."

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