Let American Oil & Gas Pay You

We are reiterating our Buy rating on American Oil and Gas (AEZ - Analyst Report) shares and increasing our target price from $8.00 to $9.00 per share. Although recent results were on the weaker side, our overall positive view of the AEZ story remains unchanged.

After booking reserves from the three Fetter Field wells it drilled in 2007 as a result of its partnership with Halliburton-backed RTA, we feel that the Fetter Field's risk profile has meaningfully improved. Even with our conservative risked reserve assumptions we feel that AEZ is undervalued at current levels. We see significant reserve and production growth going forward.

We use an NAV [net asset value] calculation to value American Oil & Gas. The company has three unique development opportunities, each with a different return potential. We believe that our NAV calculation conveys the return potential of these prospects and properly discounts for drilling costs, LOE expenses, G&A, and future taxes. In our view, the NAV calculation based on our commodity-price deck is a conservative valuation approach. Contrary to general street practice and the requirements of the SEC PV-10, we use after-tax cash flows in our NAV model.

We believe that stocks should trade at a premium to such conservatively constructed NAV estimates. Our twelve month price objective, however, is only 10% higher than our NAV estimate, reflecting the time-value premium.

Neil Malkin contributed to this report.

Read the full analyst report on AEZ.