Friday, June 28, 2013

Stone Energy: Oil and Gas Independent

The popular exchange traded fund Power Shares S&P Smallcap Energy (PSCE: Nasdaq) holds a number of energy-related companies involved in oil and gas exploration, drilling, production, distribution and servicing.  The deciding factor is the S&P Small-cap 600 Capped Energy Index that is adjusted according to float and market capitalization.  That puts Stone Energy (SGY:  NYSE) in the position of tenth largest holding in PSCE.  Four percent of the fund’s assets are held as SGY common stock.

Stone Energy is an independent oil and natural gas company that acquires, explores, and develops oil and gas properties.  The company has been operating in the Gulf of Mexico for a couple of decades but beginning in 2006 expanded its reach with onshore oil and gas shale operations in the Marcellus Share in Appalachia.  By the end of 2012 the company controlled reserves with 773 billion cubic feet of gas equivalent.  Deep water properties in the Gulf of Mexico account for about 34% of total estimated oil and natural gas reserves, while Appalachian properties account for 44%. 

In the twelve months ending March 2013, Stone Energy delivered $136.3 million in net income or $2.81 per share from $933.4 million in total sales.  That is a net margin of 14.6%, well above the 2.5% average for the oil and gas industry.  What is even more impressive is Stone Energy’s success in converting sales to cash.   In that same twelve months operating cash flows totaled $537.6 million, or 57.6% of sales. 

All the cash gets put to good use as investment in new properties and improvements as well as pay down of debt.  Stone Energy invested $610.4 million in its oil and gas properties over the past twelve months.  After paying for these investments and paying interest and principal obligations, levered free cash flow in that twelve month period was a negative $121.4 million.

As impressive as these financial details might be, Stone Energy’s place in the S&P Small-cap 600 Capped Energy Index is based only on market capitalization.  SGY was added to the index in February 1999.  Thus SGY has been a part of the Power Shares ETF from its inception.

SGY has its detractors.  Short interest increased over the past several months, rising to 11.1% of SGY flotation.  That has not discouraged the analysts with published estimates.  The consensus earnings estimate for the year 2013 is $2.84 per share on $916.6 million in total sales, representing flat performance compared to the last year.  Earnings expectations for the next year are modest  -  $2.03 in earnings per share on $884.3 million in sales.  The mean rating for SGY shares is bullish.  The consensus price target is $34.00, representing a potential gain of 55% from the current price level.  A review of historic trading patterns suggests the stock has sufficient momentum built up to achieve a price level near $37.50 per share.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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