Time to Get a Little more Serious on Rose

I've been dancing around this one for months without doing enough work.  Exposure to whatever they have in the Alberta Bakken for virtually free.  And what they have could be pretty big.

Most recent update from Barrons

Back in mid-June, Barron's published an upbeat piece on Houston-based Rosetta Resources, a smallish oil-and-gas firm run by a team of seasoned execs who left the likes of ConocoPhillips and Burlington Resources to strike out on their own. Decades in the oil patch enabled them to snap up outsized stakes in a couple of the most intriguing shale plays, long before rivals began bidding up land prices in the Eagle Ford in South Texas and the Southern Alberta Basin in Montana.


The stock (ticker: ROSE) was trading at 25. As the accompanying chart shows, following publication of the story, the shares dithered for a spell, until spurting to an all-time high of 38 last week, closing Friday at 36.

What sent the stock soaring was more than just the sharp rise in oil prices. The sparkling gain also was powered by Rosetta's smashing success in the Eagle Ford.

In barely a year, production there has surged from scratch to an awesome 55% of the company's total output. And since the Eagle Ford is rich in premium-priced liquids, margins are expanding apace.

Rosetta caught Wall Street by surprise as it sharply bumped up its estimate of recoverable reserves from the Gates Ranch area of Eagle Ford, where it has drilled 22 wells with a 100% success rate, to 7.2 billion cubic feet equivalent per well, a huge leap upward from the initial estimate of four BCFE.

What the revised estimate implies at current prices is that each well's discounted net present value is $13.4 million. Assuming all 240 development locations were drilled this year, the value of Gates Ranch alone approximates a cool $3.2 billion—a stunning 40% more than Rosetta's entire enterprise value (stock-market value, plus net debt). And Gates Ranch comprises less than half of Rosetta's acreage in the Eagle Ford.

A wild card with potentially huge investment upside is 300,000 acres that Rosetta acquired in the Southern Alberta Basin in Montana. The acreage surrounding its first five exploratory wells, all of which hit pay dirt, contains 13 million to 15 million barrels of oil per square mile, according to Rosetta's early reckoning, an amount comparable to the famed and enormously productive Williston Basin just to the east.

Management, which has tended to understate and overdeliver, says it will release details about the Alberta Basin after drilling six more exploratory wells. However, CEO Randy Limbacher recently raised the possibility that Rosetta might "step up" exploration by taking on a partner, "if we can get the right deal done."

Rosetta's earnings are growing by leaps and bounds: from 38 cents a share in 2009 to an estimated 60 cents or so this year and $1.20 to $1.30 next—which translates into $3.30 in cash flow this year and a formidable $4.80 to $5.20 in 2011.

Despite the stock's nice run, there still seems plenty of room on the upside. At $35, it's selling comfortably below a current net asset value of $40 to $45, which by no means fully reflects the terrific potential of the Alberta Basin.