Almost anyone who pays attention to the oil and gas space is familiar with the robust growth in activity in the Eagle Ford and Bakken regions of the U.S. Companies like Chesapeake Energy (NYSE:CHK), Anadarko (NYSE:APC) and EOG (NYSE:EOG) are major names in the Eagle Ford, while Continental (NYSE:CLR) and Kodiak Oil & Gas (NYSE:KOG) attract a lot of attention for their Bakken assets.

Amidst this, GeoResources (Nasdaq:GEOI) is a relatively lesser known name. Although it's not exactly undiscovered (about 14 sell side analysts cover it and over 75% of shares are owned by institutions), the relative valuation of other smaller Bakken/Eagle Ford plays suggests investors are not fully onboard the story just yet.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Growth Today, Growth Tomorrow
Outside of some legacy assets in the Gulf Coast and Southwest regions, GeoResources is a story focused on two of the fastest-growing energy producing areas of the U.S. - the Bakken in North Dakota and Montana, and the Eagle Ford in South Texas. Though a substantial portion of the company's production in 2011 still came from the legacy regions (about one-third), the company has openly talked about selling these assets to free up capital to further exploit its Eagle Ford and Bakken opportunities.

With ongoing development in the growth regions, GeoResources saw better than 20% growth in proven reserves in 2011, with the percentage of oil jumping up to 67%. Finding and development costs were relatively attractive (below $17/BOE), and there is at least a chance that the company could ultimately triple this reserve base if development activities go well.

SEE: Unearth Profits In Oil Exploration And Production

Working Its Interests
One of the drawbacks to the GeoResources story for some investors is the significant impact of working interests in the company's production and development plans. It is relatively common for exploration and production (E&P) companies to develop acreage in partnership with other companies, spreading the risk, reducing capital demands and sometimes taking advantage of other companies' experience and relationship with service providers.

In the case of GeoResources, quite a lot of production has been coming from wells where they have less than a 50% working interest (and sometimes less than 35%). While that does mean that the revenue from those wells has to be shared, the company is the operator in the majority of cases and that it gives it solid control over its fate (as much as is possibile in this industry).

It's not as though this strategy has been all bad, though. The company was in a net cash position at year's end and has $180 million in untapped borrowing capacity to fund lease acquisition and development costs. Given that more than a few E&P companies have gorged on debt, only to find themselves forced to sell or partner on unfavorable terms, this solid liquidity position is a fair trade for the drawbacks of the working interest structure.

SEE: Oil And Gas Industry Primer

The Bottom Line
There's no fail-safe valuation methodology for E&P companies. While many investors and analysts will attempt to construct net asset value (NAV) models that calculate the value of proven and unproven reserves, others will go with simpler methodologies like EV/EBITDA or EV/acreage. Though there is something to be said for the added rigor of a NAV model, the reality is that in many cases it simply replaces a simple guess with a more elaborate series of guesses.

To that end, I'm comfortable with EV/EBITDA analysis in the case of GeoResources. Smaller E&P companies usually trade at a range of 6 to 8 times forward EBITDA, and I believe the reserve and production growth potential for GeoResources merits a relatively healthy premium of 7.5 times. With that multiple, fair value for these shares comes in at around $42.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  2. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  3. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  4. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  5. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  6. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  7. Stock Analysis

    The Safest Stocks You Can Invest in Right Now

    These stocks are likely to hold up better than others in a bear market, but there's a twist.
  8. Investing Basics

    5 Reasons to Expect Lower Stock Returns

    Lower stock returns are likely here to stay for some time. Here are five reasons why.
  9. Investing Basics

    What to Cut From Your Portfolio Right Now

    Owning stocks may shortly become too scary for your portfolio. Here's why, and here are some alternatives.
  10. Personal Finance

    Careers: Equity Research Vs. Investment Banking

    Equity research is sometimes viewed as the unglamorous, lower-paid cousin to investment banking. In this article, we compare the two careers.
  1. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  2. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  3. Benchmark Crude Oil

    Benchmark crude oil is crude oil that serves as a pricing reference, ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!