Carrizo Oil & Gas (NASDAQ:CRZO) has positions in three of the best new oil plays in the United States. Because of this, the company is expected to grow its oil production by an astounding 57% this year. That's one reason why Wall Street analysts love the company. The other reason is that its stock is actually pretty cheap. Let's drill down deeper into a stock that has caught the eye of Wall Street and value investors alike.
What makes Carrizo Oil & Gas a cheap stock?
While there are many different ways to define a cheap stock, we'll use a traditional definition: one that has a price/earnings to growth ratio, or PEG ratio, of less than 1x. This simply divides a company's price-to-earnings ratio by its long-term growth rate. Carrizo's PEG ratio is 0.75, so it looks pretty cheap by this metric.
Carrizo Oil & Gas is cheap by other valuation metrics as well. For example, the company has a total enterprise value of $3.4 billion. However, the value of its oil and gas resources is well above that number. Using the PV-10 value, a way of estimating the present value of a company's future oil and gas revenue, its proved reserves of 107 million barrels of oil equivalent were worth $2 billion at the end of last year. However, Carrizo Oil & Gas estimates that it has another 4.6 times that amount, or 497 million million barrels of oil equivalent, in probable reserves.
While probable reserves are less certain than proved reserves these reserves do hold value, even if the reserves should be more deeply discounted than proved reserves. While there is a debate as to how deeply these resources should be discounted (which is why analysts value the company at $4.3 billion while Carrizo's management pegs its value at $7.7 billion), the fact of the matter is that these resources are worth more than the company's current enterprise value.
Finally, the company's enterprise value to EBITDA ratio, which is a common valuation metric used in the oil and gas sector, is 7.7x. That is right in line with some of America's top independent oil and gas companies -- and actually a bit cheaper than EOG Resources (NYSE:EOG), which has an EV/EBITDA ratio of 7.9x.
Why does Wall Street love Carrizo Oil & Gas?
Wall Street loves a cheap, fast-growing stock. This is why 19 of the 22 analysts who cover Carrizo have rated the company either a buy or strong buy. Moreover, the last three analysts to initiate coverage on the stock have either rated it at buy or outperform.
The company's strong second-quarter results, in which earnings and revenue exceeded expectations, earned it praise from Wall Street. It also didn't hurt that the company raised its 2014 oil production growth target to 57%, up from 50% at the start of the year. That prompted several analysts to upgrade the stock and raise their price targets.
Despite being adored on Wall Street, Carrizo Oil & Gas believes analysts are still undervaluing the company's potential. In the following chart, Carrizo compared Wall Street's estimates for the company's value against its own value estimate.
Here we see that while Wall Street thinks the company is worth $4.6 billion on average, Carrizo pegs its value at $7.7 billion -- substantially more than its current enterprise value of $3.4 billion.
It's easy to see why Wall Street loves Carrizo Oil & Gas. The stock is cheap no matter which valuation metric is used, as it's sitting on billions of dollars' worth of oil and gas. That makes it compelling stock for investors looking for an inexpensive way to profit from the energy boom.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of EOG Resources. 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.