What Will the Effects Be on FX Energy?

With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous so looking for stocks based on what you already know and own might be a path to pursue.

Motley Fool CAPS, the 180,000 member-driven investor community that translates informed opinion into stock ratings of one to fives, helps you focus your attention by providing you with a personalized "Stock of the Day." Using its supercomputer, it looks at stocks currently in your active pick list and then scans stocks picked by highly rated players with lists similar to yours, as well as industries in which you currently have active picks, and targets areas in which you already have an interest.

By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies on which to begin your own due diligence and research.

Buy what you know
No doubt based on my interest in the oil, gas, and consumable fuels sector where I've rated the likes of HollyFrontier (NYSE: HFC  ) and Cheniere Energy (NYSEMKT: LNG  ) to outperform the broad indexes, while also rating Teekay Tankers (NYSE: TNK  ) and Chesapeake Energy (NYSE: CHK  ) to underperform, the CAPS supercomputer thought I also might be interested in another energy play, this time oil and gas driller FX Energy (Nasdaq: FXEN  ) , which focuses its activity in Poland. It was one of five "Stocks of the Day" it offered up for my consideration this week.

When you think of the Permian Basin, you likely think of the West Texas region that Chesapeake long dominated, assets of which it recently sold to Chevron (NYSE: CVX  ) . But, Europe has a Permian Basin as well, and FX concentrates on the area beneath Poland. Let's see what the driller has going for it that might warrant an investment, even if the supercomputer hasn't yet picked it for you. Just remember, as smart as the CAPS algorithm may be, it's still just an algorithm, so be sure to look before you leap on any of its suggestions.

FX Energy snapshot

Industry

Energy

Sector

Oil, Gas, & Consumable Fuels

Market Cap

$225 million

Revenues (TTM)

$36 million

1-Year Stock Return

(18.9%)

Return on Investment

(6.8%)

Estimated 5-Year EPS Growth

N/A

Dividend & Yield

N/A

Recent Price

$4.25

CAPS Rating

****

Source: FinViz.com. N/A = not available; FX Energy doesn't pay a dividend

Polish sausage
The Polish Permian Basin is believed to have substantial natural gas resources because it's a direct analog to the southern gas basin off the coast of England in the North Sea. A major gas discovery was made in the Rotliegend formation back in the late 1950's and it's there that FX concentrates its efforts.

Unfortunately, FX Energy hasn't been too successful in its efforts thus far. After a big buildup, as it went on a risky, expensive, wild goose chase with its Kutno-2 well, an all-in bet that it hoped would let the company make its mark on the industry, FX instead crapped out. It came up empty handed and had to cap the well and abandon its efforts, resulting in a lot of money spent for naught that caused a $9 million writedown last quarter with total costs to be between $11 million and $12 million.

Like oil exploration specialist Transatlantic Petroleum (NYSEMKT: TAT  ) , which seeks outs oil in out-of-the-way locations, FX's Polish expedition has been exciting if unfruitful. They might seem exotic on a travel brochure, but pursuing oil in Turkey, Romania, and Bulgaria as Transatlantic does carries risks all its own. For FX, the greatest risk it faces, other than drilling dry holes, has been currency exchange rates.

It noted that its natural gas revenues this year were up 32% when reported in Polish zlotys, but when converted to U.S. dollars as required they were up less than half of that, or 15%. While that also lowers its capex line, FX was still feeling effects of currency differences. It reported net income of $2 million, or $0.04 per share this quarter, but when excluding currency effects, it would have reported an $8.5 million loss, or $0.16 per share, much wider than the $1.3 million it lost last year, or $0.03 per share.

A dry well of opportunity
It's difficult to recommend FX's shares even after they've tumbled 51% from their September peak because of the many problems it's run into in its drilling program. It holds a lot of hope for its future drilling program, but past expectations of success haven't panned out, particularly for shareholders.

While foreign markets hold huge potential for natural gas sales, which is one reason why Cheniere is completing its Sabine Pass export facility in Louisiana, FX doesn't seem to have the means for capitalizing on this potential. I think it still has further to fall before it's all over, so I'm rating FX Energy to underperform the market on CAPS, but tell me in the comments box below at what price you think it would be a bargain.

No buzz kill here
If you're on the lookout for some currently intriguing energy plays, check out The Motley Fool's "3 Stocks for $100 Oil." You can get free access to this special report by clicking here.


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