What May Pump Up Stone Energy

The hunt is on for undervalued oil-and-gas operators. Especially ones with the exploration and production capacity--and proven reserves--to lure deep-pocketed buyers.

"Shell Oil's hostile bid for Barrett Resources has made it open season," says one investment banker. He says a potential target is Stone Energy (SGY ), a Big Board-listed company with properties along the Gulf Coast. This pro says Stone may have already gotten bids from the likes of Phillips Petroleum, Exxon Mobil, or BP Amoco. CFO Jim Prince says he isn't aware of any offers.

In 2000, Stone produced a record 3.3 million barrels of oil and 46.5 billion cubic feet of gas. The company aims to boost production by 15% this year. Ellen Hannan of Bear Stearns rates the stock, now at 49, a buy. Stone is an "excellent operator with strong growth prospects," says Hannan, who has a 12-month target of 78. This year, she figures Stone will earn $7.24 a share and generate cash flow of $14.27 a share.

The stock, trading at just 3.8 times Hannan's estimated 2001 cash flow, historically trades at 4.5 to 9 times forward cash flow, she notes. Stone's low-cost structure and low leverage have enabled the company, she says, to lift reserves and production without straining its balance sheet.

By Gene G. Marcial

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