Tap the Rockies ... for Gas

Bill Barrett (NYSE: BBG  ) is one of countless small-to-midsize E&Ps that tend to fall through the cracks of our Foolish coverage. In fact, we haven't given the Rockies natural gas-focused company more than a passing mention or two since its auspicious debut. It's about time we did a quick catch-up.

Speaking of catching up, I think this firm's fundamentals are finally catching up to the high expectations of those heady IPO days. Like exit-eyeing Encore Acquisition (NYSE: EAC  ) , Bill Barrett is a father & son-founded follow-up to a past success. Predecessor firm Barrett Resources was sold to Williams (NYSE: WMB  ) for $2.8 billion. Valuations for the new Barrett venture baked in bounteous growth, and consequently, shares don't trade too much higher than they closed on that first day of trading back in 2004.

In the interim, the reins have been passed from father Bill to son Fred, and strong growth has indeed materialized. Proved reserves are up from 204 billion cubic feet equivalent (Bcfe) of gas at year-end 2003 to 558 Bcfe at the end of 2007, a respectable 29% compound growth rate. Production has compounded even faster.

More relevant for potential investors today is the growth that lies ahead. Fellow Rockies drillers EnCana (NYSE: ECA  ) and Anadarko Petroleum (NYSE: APC  ) have bright prospects in this part of the country, and Bill Barrett is no different. Aside from being much smaller and solely focused on the region, that is.

The firm's Uinta basin play is poised to double production -- as with Ultra Petroleum (NYSE: UPL  ) at the Pinedale field, only a positive environmental impact study stands in the way of year-round development. That doubling doesn't include upside from deep gas targets or a prospective shale play underlying the same field.

Bill Barrett has other unconventional resource plays generating strong rates of return today, but what about falling gas prices? Aren't they going to ruin the production party?

In the short to medium term, this should be the least of investors' worries, given Bill Barrett's policy of hedging 50%-70% of production. But we're all worriers these days, and shares of high-growth hedgers like Bill Barrett and SandRidge Energy (NYSE: SD  ) have gotten dumped along with virtually every other E&P. This is the kind of mindless selling that prompts value hounds like Seth Klarman to salivate.

This is just a quick sketch, but Bill Barrett appears to merit further Foolish scrutiny.

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Fool contributor Toby Shute doesn't have a position in any company mentioned, but he's pulling for several to outperform the market over in CAPS. His player profile is here. The Motley Fool has a disclosure policy.


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