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Should you buy Drillsearch?

During reporting season there are really only two kinds of stand-out announcements — the really good ones, and the really bad. While Newcrest Mining (ASX: NCM) would surely be a top contender for the worst result so far after presenting investors with a staggering $5.8 billion loss for the year, one of the standouts would need to be oil and gas producer Drillsearch (ASX: DLS).

Drillsearch announced a mighty 598% increase in underlying net profit, from $10 million in 2012 to $60 million this year on sales revenues of $102 million. In fact, Drillsearch had such a big year Managing Director Brad Lingo told reporters he had changed his mobile ringtone to AC/DC’s “Back in Black” after seeing losses for three out of the four previous years.

The company’s main focus is the oil and gas reserves held in the quickly growing Cooper-Eromanga Basin and the big growth was achieved through a significant increase in oil and gas production. This has been the result of an extensive program of exploration, appraisal and drilling, aided by extensive 3D seismic data which gave Drillsearch a massive 80% drilling success rate.

The year was also punctuated with the announcement of a joint venture partnership with energy major Santos (ASX: STO) to help speed up commercialisation of Drillsearch’s Western Cooper wet gas reserves.

This is all highly positive for the little producer with a market capitalization of $606 million, so should you put your hard earned cash on the line and buy? Outlook for FY14 is for another doubling of production, from 1.1 million barrels of oil equivalent (mmboe) to between 2.3 million and 2.5 million.

At the current price of $1.42 per share Drillsearch has a very modest price to earnings ratio of 12.8. While that is not the only important factor, for a company set to double production in the next year (and compared to established producer Santos’ ratio of 27), it certainly looks to offer good comparable value.

Foolish takeaway

Drillsearch is another company which could be in a position to capitalize on the forecast rise in East Coast gas demand in the coming years, so with a positive outlook and reasonable price, now could be the time to partner up with the company.

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Motley Fool contributor Regan Pearson does not own shares in any company mentioned.

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