Each year Steven Halpern, editor of TheStockAdvisors.com, surveys the leading financial newsletter advisors asking for their favorite stocks for the coming year. This article is part of his 24th annual Top Picks Report.
Rosetta Resources, Inc. (NASDAQ: ROSE) is the top speculative pick for 2007 from Chris Mayer, editor of Capital & Crisis. He explains, "Rosetta is primarily a gas exploration and production company; the vast majority (87%) of its gas reserves is in the Sacramento Basin and south Texas. The rest is in the Gulf of Mexico and the Rocky Mountains.
"This is no small matter. Earlier in 2006, Bolivian President Evo Morales sent his army to seize Bolivia's natural gas fields. While North American producers incur higher costs of production, they come with the added safety of having their properties safely tucked away in the United States.
"Rosetta has the opportunity to vastly increase production and add significantly to reserves. Next year alone, we could see a 40% increase in production. Earnings could double to $2 per share, assuming average gas prices of $8 (in 2006, average realized gas prices were about $7.37). Based on that 2007 estimate, the shares go for less than 9 times earnings. By 2008, total production could nearly double from 2005.
"Rosetta has ample and long-lived gas reserves. On a net asset value (NAV) basis, using only proven reserves of 359 billion cubic feet equivalent (bcfe) and assuming an average gas price of $8, I estimate NAV at $25 per share. Based on a recent price of nearly $18, the company trades at about 30% discount to NAV.
"But there is a kicker. The company also has lots of low-risk projects to pursue -- 432 drilling locations, most of them right in California and Texas -- and a historical success rate of 80%. Adding these reserves to my NAV estimate gives another $10 in upside, or an NAV of $35. Including this upside, the shares trade at a steep 50% discount to NAV.
"The market also overlooks Rosetta because it is a new (and hence unproven) company. However, Rosetta's management team has an average of 25 years of experience in the industry. Its core team has been working together for about 20 years.
"It is also on the small side of E&P companies, and it's hard for big institutional money to get a position. But that could change with new proven reserves and the expected big boost in production. In the meantime, Rosetta's small size provides an advantage, allowing investors to buy shares at prices many of the big pools of money can't."
To see Chris' favorite conservative stock for 2007, click here.
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