When Juliet said, “a rose by any other name would smell as sweet,” she probably wasn’t referring to Rosetta Resources

ROSE loading...

Quote  |  Chart  |  News  |  Profile

[ROSE  Loading...      ()   ] - and it’s a good thing. This company, one of the cheapest and most undervalued oil and gas companies out there, would not smell nearly as sweet by any other name, Cramer says. In fact, it did go by another name, and it stunk. The oil and gas assets that currently belong to Rosetta used to be part of Calpine, the now bankrupt power merchant. Nearly two years ago, Rosetta was formed to buy Calpine’s oil and natural gas assets for $1.5 billion, far less than they were worth, Cramer says. Right now, ROSE’s market cap is only $1.6 billion. It barely trades above the value of the oil and gas two years ago, before those assets were even fully developed.

Cramer thinks this isn’t right. It isn’t just undervalued – it’s dramatically mispriced, he says. Part of the reason it is so cheap is because only three analysts cover it. The stock is flying under the radar, and as long as that’s the case, Cramer thinks it could be a great deal.

Rosetta is worth a lot more than what it paid for Calpine’s oil and gas because, first of all, it bought the assets at a huge discount from Calpine when the company was spiraling toward bankruptcy. Calpine needed the capital from those assets to pay back some of its enormous debt so it got rid of them in a hurry. Cramer says the oil and gas properties that Rosetta got from Calpine are probably worth two and a half times what they paid for them, making ROSE a $35 stock masquerading as a $20 name. And that’s being conservative, Cramer says.

When Calpine had these assets, they were neglected. The company didn’t spend much on drilling projects because it was hemorrhaging money and couldn’t afford the investment. That’s where Rosetta comes in, Cramer says. It bought the oil and gas, increased production by 26% year-over-year in 2006 and brought up its reserves by 14% – all because it had the cash to drill. And get this – Rosetta plans on increasing production by 36% this year. That kind of accelerated growth, by any name, smells just as sweet.

Rosetta isn’t all roses, though. There’s a chance that Calpine’s creditors, who are in charge now that the company is in bankruptcy, could go after the assets Calpine sold to Rosetta before it went bankrupt. Cramer thinks this is unlikely because Calpine’s creditors are doing just fine. Shares of Calpine on the pink sheets went from 20 cents to now over $2.25, and the bonds have come back to par. The creditors don’t need to go after Rosetta, and Cramer thinks they would probably fail if they tried.

Bottom Line: Rosetta Resources is a cheap oil company with stellar growth and very little coverage. Cramer thinks it’s time to back up the truck with this one.

Questions? Comments?