Drillsearch Energy Limited is a hot stock for these 3 reasons

New oil discoveries producing more than projections, share price pullback from recent high may be opportunity

Oil and gas producer Drillsearch Energy Limited (ASX: DLS) is coming down from hitting a 52-week high of $1.74, pulling back to $1.55. The company had an impressive first half on top of the strong growth over the past two years.

Working with other energy companies like Beach Energy Limited (ASX: BPT) and Santos Limited (ASX: STO), it has expanded its production and sales volumes. New discoveries and further development of sites in the Cooper Basin within South Australia and Queensland have set earnings high with more potentially to come.

Here’s what it has going for it and what investors ought to know.

Production increases and rising profits – From December 2012 onwards, it saw a steep climb in production. Net underlying profits went from a net loss in 2011 to $10 million and then to $54.4 million in 2012-2013.

In the first half of FY2014, production exceeded the total production of FY2013. One reason was the successful development of the Western Flank area, operated by joint venture partner Beach Energy. The production achieved surpassed original projections.

FY2014 full year guidance is for 3-3.3 million of barrels of oil equivalent (mmboe), almost double that of FY2013.

Unconventional oil and gas – More progress is being made on the shale oil and other unconventional gas resources within the same general area. The development and exploration sites are relatively close to existing pipeline networks, which will save on infrastructure development.

It can send gas onward to customers in the eastern states or to overseas markets when the LNG exportation in QLD begins in the next twelve months. This cuts down on investing in its own pipelines, leaving more money for resource development or net earnings.

Share price movement – In the last twelve months, the stock rose 30.2%. It hasn’t exceeded the September 2012 price peak it hit before the great increase in production and could be building up steam for a further rise. It has a 6.9 PE.

The revenue growth is adding to the company’s cash position quite strongly. Within the March quarter, cash and cash equivalents increased from $76 million to $106.2 million.

It has ample funds for further resource development and should seriously be considered by investors looking for growth companies.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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