I'm Buying More of This Energy Stock


These days, it seems like my energy watchlist is full of red every time I look at it. Yesterday was a particularly harsh day in which oil and gas prices plummeted, causing much pain to most of the companies on my energy watchlist. While stalwarts ExxonMobil (NYS: XOM) and ConocoPhillips (NYS: COP) managed to fall less than 2%, other companies were not so lucky. I was most drawn to the biggest loser of the day, Double Eagle Petroleum (NAS: DBLE) . This microcap stock managed to fall almost 11%, many times more than the megacap behemoths.

Because Double Eagle's stock is rather illiquid, even one big buyer or seller can move the price on any given day. Since the stock managed to close at $7.87 on Dec. 6, it has fallen 24% to $6.00 as of yesterday's close. When the market decides to send a stock like Double Eagle down 24% in such a short period of time, you can bet that I'm paying close attention.

The rundown
Double Eagle produces mainly from the Atlantic Rim Coal Bed Methane and the Pinedale Anticline in Wyoming. The Atlantic Rim acreage is divided into three units, two of which are operated by Anadarko Petroleum (NYS: APC) . The company also has nonoperated working interests in the Pinedale Anticline, where the producing wells are operated by QEP Resources (NYS: QEP) .

Based on yesterday's closing price, Double Eagle now trades at three times trailing operating cash flow and 74% of book value. Its paltry market cap of $67 million represents just 47% of the PV-10 of its proved reserves, which stands at $144 million. By any measure, Double Eagle is really, really cheap.

But is the cheap valuation warranted? While there is a great deal of potential oily upside in its exploratory acreage in the Niobrara, it does not currently produce. That means the company is only given credit for its existing production, which is almost all natural gas by volume.

Currently, natural gas prices are brutally low and its Niobrara exploration project is just getting started. If either of these conditions improves, it will serve as a welcome catalyst. As such, I am watching both the price of natural gas and for success in the exploration of its Niobrara acreage. Practically speaking, the company cannot control the price of natural gas. That means I'm focusing my eyes on its Niobrara exploration instead, where the company can actually influence the outcome.

Slowly progressing
As far as the exploration goes, Double Eagle spud its first appraisal well in late October. We likely won't hear about the results for a while, so we're in wait-and-see mode. For next year, the company has plans to shoot additional 3-D seismic images in 2012 and has also staked out 15 potential locations to avoid potential permitting delays in the future. As I assess the situation, it's clear that it'll likely be a few years before major progress. Investors hopping on the bandwagon looking for a quick buck might get stressed out waiting for a multiyear process to happen all at once.

As we wait for the company to explore and develop its main exploratory project, it's important to note that Double Eagle is self-funded and does not need to access capital markets, which is very rare for a microcap energy company. Most companies this small are starved for more capital to increase drilling capex, but Double Eagle is already self-funded. This provides some assurance that liquidity problems will not arise.

In other words, Double Eagle's downside is much more defined than with a similarly sized oil and gas exploration and production company. That's comforting, given that we do need to allow the exploration to shape up. Time is not the friend of the business that requires frequent capital infusions, and that is fortunately not the case here.

Foolish bottom line
Energy stocks are volatile, but they often provide opportunities for the patient investor. I'm taking advantage of the recent swoon to add to my position in Double Eagle Petroleum, an unloved energy stock whose upside is currently being overlooked.

At the time thisarticle was published Paul Chi is an analyst on the Fool's Alpha and Duke Street services. You can follow him on Twitter to stay up-to-date on his latest market commentary. Paul and Matt Argersinger co-manage the Street Fighter portfolio, where they look for cheap, unloved stocks with home run potential. Paul owns shares of Double Eagle Petroleum. The Motley Fool owns shares of Double Eagle Petroleum. 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.

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