ROSE [Jan 2013]

Following the research on Synergy Resources (SYRG) I thought it was a good idea to capitalize and further enhance the know-how acquired in E&P companies. Rosetta Resources (ROSE) caught my attention recently for its valuation metrics, high growth and more recently, for its target price upgrades. Also, Oil prices are trending upwards these last weeks.

Company

Rosetta Resources Inc. (ROSE) was incorporated in Delaware in June 2005. It has grown its property base by developing and exploring acreage, purchasing new undeveloped leases, acquiring oil and gas producing properties and drilling prospects from third parties and strategically divesting certain assets that were more gas-based. It is an independent exploration and production company engaged in the acquisition and development of onshore energy resources in the United States of America. Operations are primarily located in South Texas, including its largest producing area in the Eagle Ford shale, and in the Southern Alberta Basin in Northwest Montana. 

Proved Reserves

Reserves, especially undeveloped, have increased tremendously from 2010 to 2011 (+164%) and have recorded more than a 100% CAGR '08 - '11. Total reserves grew by 100% in 2011 which represents a CAGR '08 - '11 of 34%. With just this information I can understand Rosetta sucessfully replaced its asset base. Notice that until 2010 proved developed reserves declined 25% in two years. Remember that undeveloped reserves require major expenditure before being able to be explored (developed). There's also another trend present in these charts that is extremely important in the current economic set: ROSE is focusing in aquiring/drilling oil-abundant acreage. In 2011, Oil reserves tripled while Natural Gas Liquids reserves more than doubled and Natural Gas' increased about 50%. This is a CAGR '08 - '11 of 116% for oil and just 6% for Gas. 

Obviously, this reflects a higher weight of the oil reserves in total proved reserves, from 5% in 2008 to 23%. This realignment is important as Natural Gas prices are very cheap.

The company entered into an agreement to sell its Lobo assets and a portion of its Olmos assets for $95.0 million, which was closed in the third quarter of 2012. Both are gas-producing accreage.

Production

Rosetta Resources (ROSE) recorded in 2011 a production boost of 20% after a decline of 6% in the '08 - '10 period. This increase in production was mainly due to the 150% and 140% growth in Oil and NGLs production, respectively. In fact these two are recording a fast growth with a CAGR '08 - '10 of 51% and 82%, respectively. This is the reflection of the company refocusing on higher-profit operations as I mentioned earlier. At the end of fiscal year 2011, Oil production represented 18,5% of total production (6% in 2008), whilst Natural Gas production represented 55% (89% in 2008).

Here we can see Rosetta's most recent quarter evolution regarding its production. In the 9 month period of 2012 the company produced already 95% of 2011's full year production. Comparing the same period, that means a 34% increase. also important is the fact that Oil and NGLs production keeps rising. In the 9-month period, Rosetta recorded a 100% and 62% growth in 2012 (compared with 2011) prodcution of Oil and NGLs, respectively. In the last filed quarter, Oil production was already 30% and this proportion has been growing continuously. 

Revenues

• Total revenues grew 45% in 2011;
• Oil sales increased 189% and 150% in 2011 and 2010, respectively.
• Natural gas sales decreased 35% from 2009 to 2011.
• Revenues from Oil sales rose 40% quarter-on-quarter and represent more than 60% of total revenues in the last quarter.

Operational Expenses

• Lease Operating Expense is lower as the company focuses on Oil-rich assets and divest in other areas.
• Depreciation, Depletion and Amortization increased due to an increase in production, and a lower DD&A rate was a result of a huge increase in reserves.
• The increase in 2011 General and Administrative costs was primarily related to an increase in stock-based compensation expense, in consultant costs related to various internal projects and divestiture activities, offset by a decrease of $1.5 million in salaries, wages and bonuses due to lower headcount as a result of closing the Denver office.

Recommendations and Price Targets

There are more than 20 analysts covering the firm and the consensus recommendation is "Overweight" as more than half recommend "Buy" or "Overweight" and the others recommend "Hold". Recently, someone taught me that dispersion in analysts recommendations can be a good thing because it gives the opportunity of a positive change in recommendations thus providing a boost in stock prices. Changes in recommendations usually have a much greater market impact than a reiteration as it brings new information to investors.

That is exactly what this is about. 

1. Global Hunter Securities upgraded shares of Rosetta Resources (ROSE) from an accumulate rating to a buy rating in a report on January 14th. Global Hunter Securities currently has $57 target price on the stock.
2. Analysts at Stephens initiated coverage on shares of Rosetta Resources in a research note to investors on January 11th. They set an overweight rating and a $60.00 price target on the stock.
3. Analysts at Canaccord Genuity raised their price target on shares of Rosetta Resources to $70.00 in a research note to investors on December 17th. They reiterated a buy rating.
4. Analysts at RBC Capital raised their price target on shares of Rosetta Resources from $53.00 to $62.00 in a research note to investors on November 9th. They now have an outperform rating on the stock.

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