EXXI, ROSE & SFY

[ko10068]

Credit Suisse on ROSE, EXXI & SFY

Top SMID-Cap E&P Picks

Rosetta Resources (ROSE)
ROSE recently reaffirmed its 2012 production guidance range of 220-240 MMcfe/d, with more than 90% of its planned $640MM capital budget targeting the Eagle Ford, which we argue provides among the best project returns in domestic onshore E&P. At the futures strip, 2012 capex is roughly $125MM ahead of projected cash flow, but with $100MM in cash and $300MM available on its credit facility at the end of 3Q11 no external sources of capital are required to fund the budget. We expect ROSE to deliver production and cash flow growth of 34% and 63%, respectively per year through 2013 vs. the CS SMID-cap E&P peer group median of 16% and 53%. ROSE had success in both its Gates Ranch infill program and its exploratory program outside the Gates Ranch increasing its Eagle Ford drilling inventory to almost 500 locations (~280 in Gates Ranch and ~200 in new exploratory areas) from an estimated 210 in 2Q11. Notably, at the current pace of development ROSE has roughly an eight-year project inventory and the company still has an additional 10k net acres in the liquids window of the play yet to delineate.

Energy XXI (EXXI)
EXXI is a top pick in the E&P group given projections for strong free cash generation, a deep inventory of low-risk development projects that should continue to drive growth and the cheap imbedded option on the Ultra Deep shelf play that ultimately could make EXXI the low-cost gas provider in domestic E&P. We project EXXI will generate $1.2 billion in free cash over the next three years, which would position EXXI to fund additional acquisitions and potentially accelerate development and exploration activity. In addition, this cash flow generation would allow EXXI to potentially return cash to shareholders in the form of a stock buyback or dividend.

Swift Energy (SFY)
SFY formally raised Eagle Ford well recoveries and project economics at the end of September 2011, and we estimate the liquids window of the Eagle Ford provides the company with a project inventory with an undiscounted NPV of $3.6 billion compared to the current enterprise value of only $1.8 billion. Considering SFY also has 44k net acres in the liquids-rich Olmos, 50k net acres in a JV with APC in the Austin Chalk, as well as the company’s Southeast Louisiana conventional oil inventory, the company is not short of liquids-rich development opportunities. SFY expects to deliver 20-25% production growth in 2012 driven by a $575-625 million capital budget, which at the future strip (assuming 24% production growth and midpoint of capex guidance) would equate to roughly a $190 million gap between cash flow and capex. With a recent high-yield offering ($250 million in senior notes due 2022) and an untapped $300 million credit facility, SFY has ample liquidity to fund this budget.

[dan_s]

This year's Sweet 16 is all about growth of production and proven reserves.

I need to revisit SFY. It was in the Sweet 16 two years ago.