With third-quarter earnings now in the books, we asked our energy contributors to reflect back on what they saw in the sector. They came away impressed by several companies, but here is their top choices.
Getting better in the Bakken
Tyler: One company that has continued to impress me is Continental Resources (NYSE:CLR), and this past quarter was no exception. Aside from the increased production—which is up almost 40% year-over-year—the one thing that struck me the most was what the company has in store. Continental has plans to start drilling as many as 30 wells at an individual drilling site to tap both the Bakken formation as well as multiple layers of the Three Forks formations. This helps the company in 2 ways:
- It helps to drive down drilling costs. This time last year, the average well in the Bakken cost as much as $11.2 million. With the incorporation of these Mega-pads, Continental estimates it will be able to get the average well cost down almost 33% to $7.5 million.
- Multiple wells in a single spot means the company can start to monetize its natural gas production rather than flaring it. This means higher revenue and helps solve one of the Bakken's largest problems.
I'm excited to see how this new drilling program works out and if other producers in the region will start to follow suit.
Matt: I've been most impressed with BreitBurn Energy Partners (NASDAQOTH:BBEPQ). The company had a rough start to the year and drew the attention of short-sellers that suggested the company's units were basically worthless and its distribution a mirage. BreitBurn stood its ground and flat out delivered on its promises.
It was able to be creative to secure a big oil deal, and its drilling program produced a lot of high-margin oil. Because of this, it's back on solid ground. With a yield of over 10%, BreitBurn Energy Partners is a must-buy for income investors.
Best deal of the year
Aimee: After a veritable onslaught of master limited partnership IPOs this year, the company that really impressed me in the third quarter was Devon Energy (NYSE:DVN). Devon bucked the MLP spinoff trend and opted to merge its midstream assets with the Crosstex Energy entities instead, helping itself to a 70% stake in the new general partner and all the incentive distribution rights that come with it. It will also control 53% of the new MLP via 120 million limited partner units.
In one fell swoop, Devon is able to monetize its $4.8 billion in existing assets, take advantage of cheap capital for future growth of these assets, and plug into a reliable new income stream. The new entity will be staring down an investment grade rating with an expected debt-to-EBITDA ratio of 2.5 times, 95% fee-based cash flow, and a diverse geographic footprint. It may well wind up being the best MLP deal this year.
All three companies really impressed this past quarter. Each not only delivered on past promises but all went a step further and over delivered. Better yet, all three appear to be well positioned to deliver exceptional long-term value to investors.
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