This Oil Driller is on Steroids: From Zero to $1.3 Billion in Four Years

by David Fessler, Investment U’s Energy and Infrastructure Expert
Monday, October 11, 2010: Issue #1363

If you’re looking for a trend-defying, against-the-grain stock pick to kick off your week, you’ve come to the right place.

As I scan the various industries in the energy and infrastructure sectors, there’s one that has about as much appeal as pouring lemon juice into an open wound.

The oil drilling industry.

In the wake of the Gulf oil disaster, it’s just about the last place that many investors want to be. And the numbers bear it out…

Since BP’s big blowout, shares of Transocean Ltd. (NYSE: RIG) have crumbled by nearly 30%. Atwood Oceanics, Inc. (NYSE: ATW) shares have sunk nearly 20% since the disaster. And share prices of other deepwater drillers are also down.

But we’ve never been a group that blindly follows the crowd, or lets others dictate what we do.

And in this case, despite the bad publicity, taking a look at the oil drilling industry is even more warranted because not all drillers are created equal. In other words, they don’t all operate deepwater rigs in 5,000 feet of water. In fact, many don’t drill in water at all. So how have they fared since the spill?

Some have suffered a similar fate as offshore drillers – guilt by association – based on the myopic views of some industry analysts.

But others have dodged the Gulf oil disaster – like the company I’m about to profile below. And the plan that the firm’s seasoned industry executives put together a long time ago – to build a profitable, land-based oil and gas exploration company from the ground up – is paying off big-time…

Drilling in the Dirt Instead of the Ocean

Rosetta Resources, Inc. (Nasdaq: ROSE) is an independent oil and gas exploration, development and acquisition company.

Unlike many of its larger competitors, Rosetta is perfectly happy drilling in the ground. Most of its current operations are located in south Texas, the Rocky Mountains and the Sacramento Basin in California.

And its ground-drilling strategy has laid a strong foundation: low-cost reserves, a solid balance sheet, ample cash flows and a crackerjack management team led by CEO Randy Limbacher.

But there’s more to this story than just a thriving drilling company…

Rosetta… Quietly Planning While Others Were Panicking

Limbacher’s goal was to take Rosetta in the direction of unconventional shale resource plays like the Bakken and Eagle Ford basins.

When energy prices dropped a few years ago, Limbacher’s strategy looked like it might fail. But he combated the upheaval by overseeing a 60% cut in the company’s spending – a decision that maintained its solid foundation.

Case in point: During 2008, Rosetta drilled 184 wells. But in 2009, that number dropped to just 43 wells. However, 83% of them were successful and the company used the cash it saved to purchase additional promising oil and gas acreage on the cheap.

And despite the huge spending cuts, Rosetta’s production only declined 6% in 2009 – due in large part to the exploration successes that resulted from its more selective drilling process.

But what really boosted Rosetta’s bottom line was…

These Wells Give Rosetta Repeat Revenue

“Legacy wells.”

Like a retailer who sells goods that people always need, Rosetta is also able to enjoy repeat revenue from “legacy wells” – wells that churn out continued production and, in turn, generate a steady, predictable income stream for the company.

As a result of those legacy wells, new production from Rosetta’s Eagle Ford Rosetta’s Eagle Ford acreage, plus a successful drilling program in the Rocky Mountains, Rosetta now forecasts a 5% to 12% production increase in 2010.

The Eagle Ford basin is particularly promising. Rosetta has six wells in production there, with a further five awaiting completion and another 30 or so planned.

It’s highly impressive execution, given that Rosetta has taken Eagle Ford from the concept stage to full-scale production in less than a year. And it’s the driving force behind a four-fold increase in the company’s proven reserves.

So if you’re looking to get into the oil and gas sector without worrying about the next Gulf disaster, take a closer look at Rosetta Resources.

The company only debuted on the stock market in 2006 and it already boasts a $1.3 billion market cap. And a year from now, there’s an excellent chance you could be sitting on some excellent gains.

Good investing,

David Fessler