×

Cramer: Oil patch plays unlocking the secret formula for higher stock prices

Oil and gas stocks have made a strong resurgence this year, but it was the savvy moves of the exploration and production companies that are the true shining stars for Jim Cramer.

The energy sector has now become the best performing group in the S&P 500, which is astounding considering that the price of crude has stalled in the mid-$40s and natural gas remains stuck below $3 per million British thermal units.

Exploration and production companies made the prudent decision to control their own destinies, and have made acquisitions to buy high-quality acreage at low prices.

"These opportunistic oil and gas producers seem to have discovered the secret formula for generating much higher stock prices in this environment," the "Mad Money" host said.





Oil workers on a drilling platform.
Tyler Stableford | Getty Images
Oil workers on a drilling platform.
"These companies have practically written the playbook for what every other exploration and production firm should be doing in this environment." -Jim Cramer

In particular, Cramer examined the moves of PDC Energy, SM Energy and Pioneer Natural Resources, which have all taken advantage of the energy volatility to scoop up profitable acreage.

"These companies have practically written the playbook for what every other exploration and production firm should be doing in this environment," Cramer said.

PDC Energy is a $3.2 billion company that until recently was solely focused on the Wattenberg gas field in Colorado. It made a big pivot when it acquired two businesses owned by Kimmeridge Energy Management for $1.5 billion in cash and stock.

In March, PDC made the strategic decision to issue a large secondary offering, selling nearly 6 million shares at $51 per share, and raised $300 million. The original purpose of the secondary was to pay down debt that was coming due, but it also allowed PDC to have the flexibility to make growth-boosting acquisitions.

PDC closed at $69 on Tuesday, a 37 percent gain for those who participated in the company's secondary offering.

SM Energy is a $3.3 billion company that purchased nearly 25,000 acres in the Midland Basin in Texas on Aug. 8 for $980 million from Rock Oil Holdings. The move nearly doubled the company's presence in the Midland Basin.

SM Energy also announced both a secondary offering and an offering of convertible notes. The secondary sold 18.4 million shares at $30 a share, netting $531 million and the convertible debt brought in another $150 million.

Additionally, SM sold non-core assets in New Mexico, North Dakota and Montana, which allowed it to raise an additional $172.5 million. Since purchasing the Rock Oil assets, SM Energy has been upgraded several times and closed at $38 on Tuesday.

"What makes this story all the more impressive is that at the beginning of the year, SM had basically been left for dead … Since then, the stock has quintupled as investors realized this company has a bright future, as opposed to no future," Cramer said.

Pioneer Resources is the larger $30 billion company that simultaneously announced it would buy 28,000 acres in the midland basin from Devon Energy for $435 million, and also did a secondary offering of 5.25 million shares. The move allowed the company to have additional acreage in a profitable region that it already had a lot of business.

Cramer has liked the energy companies doing smart secondary offerings for a long time, but what made Pioneer, SM Energy and PDC Energy unique is that they issued the secondaries to pay for smart acquisitions.

"I like them here, but longer-term, keep an eye out for the next exploration and production firm to do the same savvy deal making, because that is where the upside is," Cramer said.


Questions for Cramer?
Call Cramer: 1-800-743-CNBC

Want to take a deep dive into Cramer's world? Hit him up!
Mad Money Twitter - Jim Cramer Twitter - Facebook - Instagram - Vine

Questions, comments, suggestions for the "Mad Money" website? madcap@cnbc.com