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3 Energy Companies with Enormous Hidden Upside

By Matthew DiLallo - Mar 11, 2014 at 9:40AM

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While proved reserves provide the foundation of value for an energy company, it’s the contingent resources that provide the upside.

Energy investors need to know a lot of industry lingo in order to seriously invest in oil and gas stocks. One of the key words to know is proved reserves. This is the oil and gas in the ground that's controlled by an energy company that it is reasonably certain in its ability to extract given current economics and technology. However, on top of proved reserves some companies are just loaded with potential future reserves that are known as probable and possible reserves. In addition to that, many companies have even more potential in what are known as contingent reserves. Add it all up and these hidden assets can point to enormous future upside.

Three energy stocks just loaded with upside are Magnum Hunter Resources (NYSE: MHR), Laredo Petroleum ( LPI -2.72% ) and Diamondback Energy ( FANG -0.40% ). Let's take a closer look at this potential.

Appalachian upside
Magnum Hunter Resources has proved reserves of 75.9 million barrels of oil equivalent, or BOE. The PV-10 value of those reserves, or the present value of those reserves discounted by 10%, is $922.1 million. Because of that those reserves provide a solid foundation for a company with an enterprise value of $2.6 billion.

Where things get really interesting is when we consider that Magnum Hunter Resources has another 61.5 million BOE in total probable and possible reserves as well as a staggering 728.9 million BOE in contingent resources as the following slide shows.

Source: Magnum Hunter Resources investor presentation (link opens a PDF)

The company sees just the undeveloped acreage value of these contingent resources being worth $1.6 billion to $2.1 billion. When combining that with the company's midstream and drilling operations worth another $450 million, and the company sees its asset value being worth more than $3 billion. On a per share basis it sees a value in the range of $10.14 to $14.12 per share, which is substantially higher than the current $8 stock price. As Magnum Hunter Resources develops its acreage and proves up some of these reserves it has the potential to realize even more future value. 

Everything's bigger in Texas
Permian Basin focused Laredo Petroleum and Diamondback Energy see similar upside from resource potential. Laredo Petroleum sees its resource potential being more than 10 times its 204 million BOE in proved reserves. The company has already identified another 1.4 billion BOE of resource potential based on un-booked well locations within its current portfolio. However, Laredo Petroleum sees significant additional resource potential beyond that as it sees additional zones that could be horizontally developed as well as the potential for down-spacing of future wells as the following slide shows.

Source: Laredo Petroleum investor presentation (link opens a PDF)

Likewise Diamondback Energy sees significant resource potential in the Permian Basin. The company, which has proved reserves of 63.6 million BOE, sees its horizontal resource potential growing by another 393 million BOE as the below slide details.

Source: Diamondback Energy investor presentation (link opens a PDF)

Both Laredo and Diamondback are early in developing new zones within the Permian Basin. Because of that this potential is likely to continue growing as these companies are still determining the best way to unlock all of the oil and gas locked within the multiple layers of the Basin. That leaves room to believe that there could be even more upside potential in the future as these companies develop the basin.

Investor takeaway
We're still in the very early stages of the shale revolution in some parts of the country. Magnum Hunter Resources, for example, is just beginning to discover its potential in the Utica Shale. Meanwhile, both Laredo Petroleum and Diamondback Energy are still in the early stages of unlocking additional zones of the Permian Basin. Because of this there's still an enormous amount of upside for these three oil and gas companies.

This is the best stock to buy in 2014

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Diamondback Energy, Inc. Stock Quote
Diamondback Energy, Inc.
FANG
$106.00 (-0.40%) $0.43
Laredo Petroleum, Inc. Stock Quote
Laredo Petroleum, Inc.
LPI
$55.42 (-2.72%) $-1.55

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