Crimson Exploration Is the Opposite of a Buy

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The rough days aren't over for small-cap Crimson Exploration (NAS: CXPO) . With a cloud of uncertainty still looming large, how does this stock look to the long-term investor?

Lousy fundamentals
Average daily production for Crimson fell by 14% in 2010. Corresponding sales volumes fell by 11%. Naturally, revenues dropped as well. The company is still paying the price of a huge cut in capital expenditures in 2009.

Crimson also sold off its southwest Louisiana properties in December 2009, which hampered production. Putting core assets on the block isn't exactly a long-term business strategy. The divestiture reflects the level of desperation on management's part to bring down the company's debt to more manageable existing levels. Foolish investors should take note.

A mountain to climb
Yet, surprisingly enough, Crimson is staging an improvement in terms of reserves, which actually raises hope. Proved reserves grew 71% in 2010 to 166.5 Bcfe. But the company has a long way to go as only 48% of these reserves have been developed.

Capital expenditure funding might again prove to be a problem, given the current bearish market for natural gas. I'm not too confident of the prospects since an overwhelming 81% of proved reserves happen to be natural gas. Trailing-12-month free cash flow of $17 million looks too small to catalyze a dramatic turnaround.

With a debt-to-equity ratio of nearly 96%, and declining sales volumes and revenues, things look pretty bleak in the short term for Crimson.

How is the stock valued?
This is how Crimson stacks up compared to its peers:

Company

TEV/EBITDA

(TTM)

PEG

(+5 years)

Current Ratio

Crimson Exploration7.5(2.0)0.4

GMX Resources

(NYS: GMXR)

13.5N/A2.4

ATP Oil & Gas

(NAS: ATPG)

12.6(1.0)0.7

Abraxas Petroleum

(NAS: AXAS)

19.6N/A0.6

Northern Oil & Gas

(NYS: NOG)

50.21.03.2

Source: Capital IQ, a Standard & Poor's company; Yahoo! Finance. TTM = Trailing 12 months

Crimson looks relatively cheap compared to other small-cap stocks. Unfortunately, I don't find that too surprising. The market has valued it rationally and the stock isn't worth much.

The company also faces liquidity issues, which should make longer-term investors quite nervous. Relatively, its current ratio is among the worst. Running day-to-day operations is not a sure bet and the company could run into unexpected trouble with nothing to fall back on.

Foolish bottom line
Unless Crimson bucks up and increases its production rates, I do not see much hope. And this currently looks easier said than done. There's not much here for the long-term investor. I would stay away from the stock until I see some visible changes in the fundamentals.

At the time this article was published Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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