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A Long Term Play that Should be on Your Radar

Since my last column pointing out the vast value I saw in back month crude futures, I wanted to try to translate that opportunity into stock ideas.  I invited subscribers to email me with their thoughts using these criteria – Liquids potential over dry gas, direct investment in the ‘hot’ plays in shale but probably excluding the Bakken (mostly overpriced and overhyped); and underperforming, most likely because of a less than stellar balance sheet.  All of these would benefit marvelously from a crude barrel price that was under $90 less than two years from now, but could be hoped to be projected at closer to $110 a barrel or more as they arrived as the “spot” (current) month.  

You have impressed me – and humbled me.  First, I must be very careful what I write:  I see that I have an extremely engaged audience that enjoys scoping out energy ideas almost as much as I do – and your ideas are not coming without homework and knowledge:  I got some fantastic stock ideas, so many in fact that I’m going to defer my own ideas for another column and work with just a few of yours – they’re terrific.

My friend Cynthia suggests Resolute Energy (REN), a $600M market cap company engaged in the Areth region of Utah as well as holding potential acreage in the Permian basin.  Resolute’s had a tough time, and the chart shows their stress, having been as high as $11.50 as recently as April, only to trade under $8 for most of the summer.  Since a good report from their Areth wells, they’ve been able to support an $8 secondary, a much-needed infusion of cash.  And, while I know I’ve suggested that balance sheet shouldn’t need to be stellar, Resolute’s is tough to like, even with good acreage, holding $600M of debt.  Continued good results from the Areth should spur the needed E+P into their Permian assets, but even with their secondary, it’s a tough bet on cash flow.  Still, if you’ve participated on the secondary, you’re up 10% -- a great result.  But for the long-haul play I’m looking for, I’ll pass on Resolute.  

Pete suggested Approach Resources, (AREX). Unfortunately, he did it about 2 days too late.  In a great move on timing, JP Energy just announced today that they were buying all of AREX’s Permian assets, which is the play I most wanted if I were to concentrate on Approach for us.  Before this sale, AREX was the kind of stock I would have liked – decent balance sheet, good acreage, and flat stock price for most of 2013.  But with the discount gone today (AREX is up 7% on the news) and the Permian assets shed, we’ve got to go elsewhere.  

Roland liked Clayton Williams (CWEI), a company I’ll admit I’ve had a bear of a time getting a handle on for years.  The 81-year old founder is a real old wildcatter and he seems to go wherever his instincts take him and always has.  A big part of his business now is in transport and liquids treatment and storage, including water (!).  The stock’s been a roller coaster, down from $120 and $100 plateaus to trade now nearer to $50.  Is it value here?  Not for me.  I still can’t get a handle on what their core business is, but I will bless anyone who has traded this one successfully – more power to you.  

We do have one winner here – one I was going to suggest myself but won’t take the credit, giving it to subscriber Evan:  Synergy Resources (SYRG).  Synergy is in the Wattenberg play with acreage that is similar to Noble (NBL), and a play that I love for its under-the-radar appreciation.  They’ve slowly but surely increased exposure there while retaining a stellar balance sheet with virtually zero debt.  They’re not entirely in liquids, retaining some dry gas acreage in Colorado, but are quickly concentrating on their 40K leased acres in the Wattenberg and increasing their asset purchases there.  

The strategy shows.  You could have bought Synergy as low as $3 a share as recently as September of 2012 and after leveling off around $7 in the summer, good reports from wells shot the stock up to over $9.  

Sure, I’d like to buy it cheaper. But for the long-term play that we’re looking for, Synergy should still have plenty of upside left, more than a double in my mind.  I’d establish a small position here and wait for a down tick, and if I had to, buy it going up.

Synergy Resources meets all the criteria we set – and it’s a recommended holding.

Thanks to all of you – and thanks Evan…….good call.

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