3Tec Energy Corp.'s current stock price does not accurately reflect the company's underlying asset value or its growth potential through existing-asset exploitation and acquisitions, says Jonathan D. Wolff, vice president and E&P analyst for First Union Securities in New York. "Our positive view of 3Tec is further supported by its strong leadership, natural gas focus and exceptional balance sheet strength," he adds. The firm recently resumed coverage of TTEN with a Buy and a 12-month price target of $18 per share. Based in Houston, 3Tec Energy is an independent producer that acquires, develops and explores for oil and gas reserves, in several regions: East Texas, the Gulf Coast, the Midcontinent and the Permian and San Juan basins. Through three major acquisitions, which have a Texas and Louisiana Gulf Coast focus, during the past year the new publicly traded company (formerly Middle Bay Oil Co.) has rapidly grown its 78% natural gas reserve base to more than 300 billion cu. ft. equivalent, and its daily production to 70 million cu. ft. equivalent. "3Tec's senior management team, led by Floyd Wilson, consists of a group of seasoned oil and gas professionals who possess deal-making ability, a keen shareholder focus and technical expertise," says Wolff. The team has been very successful in making strategic acquisitions at below-market averages, he says. "Transaction economics have averaged just $3.84 per equivalent bbl., well below a recent industry [transaction] average of $5-plus per equivalent bbl. and a three-year industry finding and development cost average of $7.50 per BOE." In its acquisitions, 3Tec looks for four components. First, a natural gas focus, because management has considerable confidence in the sustainability of strong natural gas pricing, the analyst says. Second, operating control, so that it can use its skills to reduce field-level costs and control the timing of [drilling] opportunities; third, lots of proven undeveloped reserves and overlooked exploitation-type opportunities; and fourth, exploration follow-on potential. "The company has developed a clear strategy for growing, with a particular focus on realizing terminal value for its shareholders. During the next one to two years, we believe it would like to at least double its asset base-to about 600 billion cu. ft. equivalent." With a strong balance sheet and significant unused borrowing capacity, 3Tec has the ability to do that. "We estimate the company could complete a $200- to $220-million cash deal under its current financial structure," says the analyst. "Furthermore, given its robust anticipated free cash generation, we expect the company will be able to pay off all its outstanding debt by mid-2001." While the stock has appreciated 60% since this past June-versus 20% for the rest of the E&P group-there remains significant further upside, says Wolff. "Likely due to a limited [investor] understanding of the expanded company, the stock still trades at a 20% discount to our estimated net asset value of $18 per share." Note: Analysis took place 10-5-00 when TTEN closed at $13.88 and was reaffirmed 10-30 when $14. Currently, some 14.4 million shares are outstanding. The recent 52-week price range was $17.25-$6.38.
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