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Is This The Most Undervalued Energy Stock?

When a sector is under pressure, as energy is now, individual stocks often get dragged down with everything else to a point that just defies logic. That is the case now with the Colorado-based oil and gas E&P company PDC Energy (PDCE). The stock has lost over half its value since the 52-week high just under a year ago and is now trading at trailing and forward P/Es of 11.59 and 7.21 respectively. Those are low, even for an energy stock, but there are signs that won’t last, and a bounce back looks likely.

When an industry is facing tough times, companies face a choice. They can baton down the hatches, reduce costs, cut production, and try to ride out the tough times, or they can take advantage of the weakness and expand in anticipation of a recovery. PDCE took the second tack, and that is in part why their stock has been hit so hard.

A couple of months ago, they announced the acquisition of SRC Energy in an all-stock deal valued at around $1.7 billion. Issuing stock for any purpose dilutes the value of existing shares, but the value of the acquisition also has to be considered. When a company makes that move in a depressed market, there is a tendency to undervalue the purchase, and that is what happened here.

SRC is a good fit for PDC. The acquisition leaves them with a large, contiguous lease in the Denver-Julesburg (DJ) basin and should result in significant cost savings, yet the stock is lower now than when the deal was announced.

Perhaps…



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