It's hard not to be tempted to jump onto Santos Ltd (ASX: STO) following a takeover bid for the energy stock but Morgans thinks there is another stock in the sector that will offer a much bigger pay-off.
This is despite Santos trading at a greater than 10% discount to the indicative offer price of $6.50 a share even after the stock rallied 16.2% to $5.89 on Tuesday.
But that's nothing compared to Morgans' forecast 255% increase in Sundance Energy Australia Ltd's (ASX: SEA) share price!
The broker initiated coverage on the junior energy company with an "add" recommendation and 21 cents a share price target as it undertakes a game changing acquisition.
This compares to Sundance's last traded price of 5.7 cents as the company closes off its retail entitlement offer as part of its $331.2 million capital raise.
That's a supersize raising given its market cap of just over $70 million and Morgans' price target accounts for the dilutionary impact from the mega capital raise.
But transformative acquisitions don't come cheap and its purchase of 21,900 acres of land at Eagle Ford in the US could make it one of the largest oil producers on the ASX.
Interestingly, BHP Billiton Limited (ASX: BHP) is trying to get rid of its shale assets at Eagle Ford. I guess man's methane is another man's poison.
According to Morgans, Sundance will increase its net acres to 56,600, grow production from its current ~9,000 barrels of oil equivalent per day (boepd) to 21,500-22,500 boepd in 2019, and expand its proven reserves (called 1P) to 113 million barrels of oil equivalent (mmboe).
This gives Sundance a pro-forma enterprise value (EV) of around $600 million and that compares very favourably to its peer Beach Energy Ltd's (ASX: BPT) EV of $3.14 billion even though Beach has similar 1P reserves and debt levels to Sundance.
What's more, the capital raise should be sufficient to fund Sundance till it becomes free cash flow positive. This means the energy company is unlikely to need to raise more cash in the future to fund working capital requirements.
That's a great position for any junior oil and gas company to be in. Let's just hope the oil price stays at the top end of its trading range as a reasonably modest US$5 change in the price of crude will move Morgans' valuation by a very significant circa 6 cents per share!
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