Barron's Says Swift Energy (SFY) Should Trade Higher

August 4, 2008 9:33 AM EDT

In this weekend Barron's, it talked about an overlooked oil and gas play, Swift Energy (NYSE: SFY). Swift Energy is a oil and gas producer with 134 million barrels of proved reserves.

In the past month, Swift Energy's stock has fallen 25% as oil prices have fallen and is trading just at 5.4 times projected profits. The market is valuing Swift's reserves at a measly $17 per barrel, while its peers, including Stone Energy (NYSE: SGY) and Brigham Exploration (Nasdaq: BEXP) are trading at $32 a barrel.

Heartland Advisors' Brad Evans thinks that Swift's cash flow could justify a $85 to $90 a share even if oil falls to $80 a barrel. Currently, Swift Energy is trading around $50. "With Swift, you get a lot of oil exposure, some natural gas, and an improving balance sheet and production profile at a big discount to peer [companies] and net asset value," Mr Evans said.

A key reason Swift's stock price isn't higher because Swift hasn't delivered production growth, relying mainly on the rising commodity prices to produce its increased profits. For example, Swift's Q1 EPS rose 88%, while production growth was only 1%. However, Jefferies & Co thinks that Swift's production problems could be solved in the second half of the year as it has approximately eight new wells coming onto the market.

Short sellers have been feasting on Swift and doing well so far. Actually, short interest jumped to 6.4 million shares, or 21% of the shares outstanding. However, if Swift Energy is able to follow its plan and boost production, Swift will squeeze the shorts, and most importantly, produce significant profits for its investors.

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