Energy Prospectus

Everything in the 1st quarter results beat my forecast. I will have an updated forecast model posted to the website late today.

For the first quarter ended March 31, 2011, Rosetta reported net income of $11.0 million, or $0.21 per diluted share, versus a net income of $7.3 million, or $0.14 per diluted share, for the same period in 2010. These results include a $1.8 million after tax gain related to the settlement of hedges associated with the divested DJ Basin property.

Production for the first quarter of 2011 averaged 155 million cubic feet equivalent per day ("MMcfe/d"), up 25 percent from the first quarter of 2010. The increase was primarily driven by production growth from the Eagle Ford shale, which averaged approximately 89 MMcfe/d for the first quarter of 2011, up from 7 MMcfe/d for the same period in 2010. Oil, condensate and natural gas liquids ("NGLs") production reached an all-time high for the quarter, averaging approximately 8,500 barrels per day. Liquids production made up 33 percent of the Company's total production mix. Daily liquids production continues to rise and as of May 2, 2011 was 11,000 barrels per day.

Increased my Fair Value estimate to $67/share. Very impressive.

You should all take a hard look at CRZO. I'm expecting some VERY BULLISH news on their Eagle Ford drilling program tomorrow.

ROSE has nothing in its guidance for the Alberta Bakken, either, and they could barely contain their enthusiasm for that prospect.

ROSE has 300,000 acres up in the NW Montana "Alberta Bakken". It certainly appears that they like what they see so far. If things work out up there, it could be a major boost to my Fair Value estimate.

From Barron's on-line 6/18/11:

"Small driller's earnings and cash flow remain on the rise, aided by the promise of Eagle Ford and the Alberta Basin. Could stock double in a year?"

Things just keep getting better and better at Rosetta Resources.

As readers of these pages may recall, Houston-based Rosetta (ticker: ROSE) is a smallish oil-and-gas outfit run by a team of seasoned execs who left top jobs at industry giants like ConocoPhillips to strike out on their own. What they were eager to build, as Barron's explained in a thumbs-up story ("Resourceful Rosetta," June 14, 2010), was a company that could exploit unconventional energy sources like shale. At the time, the stock was 25. It got as high as 51 earlier this month and closed Friday at $42.98.

The Eagle Ford, a shale play in southern Texas, could add 50% to Rosetta's cash flow per share in 2012.

The juice for the strong performance has been Rosetta's remarkable transformation from a run-of-the-oil-patch producer into a potential powerhouse, thanks to the speed and efficiency with which it is moving to exploit its vast acreage in two of the country's most promising shale plays. One is the Southern Alberta Basin in northern Montana, conceivably the next big thing if it proves an extension of the enormously productive Williston Basin to the east. Rosetta holds 300,000 acres.

An even more important catalyst has been the astonishing pace of development in the Eagle Ford in South Texas. From virtually nothing a year ago, output last quarter spurted to 89 million cubic feet equivalent a day, almost 60% of total production. Even after divestitures, year-end output should jump to 185-195 MMcfe/d—with the Eagle Ford chipping in a whopping 80% of that.

Production from these wells has put them on a pace to outstrip early estimates of what they will yield over their lifetimes, a benchmark already ratcheted up from four billion cubic feet equivalent to 7.2 Bcfe. Output is low-cost and liquids-rich, so margins are expanding apace. And it's just the beginning: Rosetta has drilled only 7% of its prospects in a field that accounts for less than half of its 65,000-acre Eagle Ford stake. Moreover, while current wells recover a mere 14% of the hydrocarbons in the ground, Rosetta believes that it eventually might recover as much as 25% by drilling more wells closer together.

Fueled by the Eagle Ford, earnings are expected to hit $1.80 a share this year and $3.30 next, while cash flow is pegged at just under $6 a share this year and close to $9 in 2012.

Meanwhile, in the Alberta Basin, Rosetta has drilled 11 vertical test wells spread across its vast acreage. John Clayton, its vice president of asset development, says that the company has found "large accumulations of oil in every well." Significantly, Rosetta has shelved the idea of a partner, choosing instead to drill three horizontal wells on its own dime, says CEO Randy Limbacher, because "we like what we see so much."

Rosetta's stock is going for about seven times this year's estimated cash flow and under five times 2012's. It sells well below a net asset value of $60 to $65, which by no means fully reflects the terrific potential of the Alberta Basin. Should that play pan out, the stock could double.

-- Rhonda Brammer