1 Energy Small Cap for Your Watchlist

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It is easy to forget about small companies like Gastar Exploration (AMEX: GST) with natural gas giants Chesapeake Energy and ExxonMobil hogging the headlines. The company completed its first two wells in the Marcellus shale last summer, and stands poised to have a compelling 2012.

Getting to know you
Gastar is a small natural gas company with assets in East Texas and Wyoming, though its current focus is on developing its acreage in the Marcellus shale where it has 99,300 gross acres under lease. Here are some quick stats about the company:

Share Price$2.93
2011 Stock Performance(29.02%)
Market Cap185.29 million
Debt/Equity (most recent quarter)4.44
CAPS Rating (out of 5)****

Source: Yahoo! Finance and Motley Fool CAPS. Share price is as of this writing.

2011 was a rough year for the stock, but the company has released some important numbers that signal things may be better in 2012.

Reserves are up
Gastar reported proved reserves were up 138% over its year-end total last year. The 119.7 BCFE breaks down to 76.6% natural gas, 9.6% oil and condensate, and 13.8% natural gas liquids. The pre-tax present value of the reserves discounted at 10%, or PV-10, increased to a whopping $217 million, from $67 million the year before. Seventy percent of the reserve volumes came from the Marcellus acreage.

Plan for 2012
Gastar set its 2012 capital budget at $134.2 million, the majority of which will be directed toward the Marcellus shale. The company plans to spend $103 million drilling and completing 20 gross wells in West Virginia, while also completing 10 gross wells that were drilled in 2011.

Gastar also plans to spend $19.8 million on a mid-continent oil-focused venture. This is a great hedge, because while Gastar is focused on liquids production in the Marcellus shale, gas dominates its production breakdown. Drilling is expected to commence in the new play during the second half of 2012.

Analysts see a solid upside to this stock this year. See the table below for more forecasts for 2012:

Median Target Stock Price$5.00
2011 EPS Estimate(0.04)
2012 EPS Estimate0.18
2012 Revenue Estimate$83.6 million
Forward P/E16.28

Source: Yahoo! Finance.

Foolish takeaway
This could be Gastar's breakout year. An important first test will be whether the company hits its first-quarter production estimate. Gastar anticipates a rate of 26 MMcfe to 28MMcfe per day, comprised of 12% to 16% liquids production. Stay up to date on Gastar Exploration insight and analysis by adding it to My Watchlist.

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