You hear a lot about the shale gas boom in North Dakota and Pennsylvania, but interest has increased in Texas plays due to a positive mention of the natural gas industry in the President’s State of the Union address. The Chesapeake Energy website wrote of one Texas shale area, “The Haynesville Shale… has the potential to become the largest natural gas play in the U.S. by 2012, with technically recoverable resources estimated at 251 trillion cubic feet.”
In the early part of the twentieth century dynasties of Texas wealth were born and so is another generation in the twenty first. One thing all these new wealthy have in common- they need a bank to help invest their royalties – at the very least to cash the big checks. There are several Texas regional bank chains that fit the bill. Rather than play risky exploration and development oil and gas stocks these banks will benefit not just from royalty holders, but also from a general local economic boom. The Dallas Fed put out a report in mid-2012 that drilling in the Eagle Ford area (23 counties) has spurred strong employment and wage growth. Just extrapolate that to the other two shale areas.
One regional bank that is promising is Texas Capital Bancshares Inc (NASDAQ:TCBI), the holding company of Texas Capital Bank, with $10.5 billion under management and headquartered in Dallas for a total of 13 full service centers with branches in San Antonio, Houston, Ft. Worth, and Austin. This is a fairly new bank, only founded in 1996, but it was founded by Dr. Joseph M. (Jody) Grant, the American Community Bank Banker of the Year in 2001 and author of two books on Texas banking. His mission: to make Texas Capital “The Best Business Bank in Texas” and that’s still their slogan.
When researching community banks to profit on these shale booms it’s important for a bank to offer wealth management, private client services, and community banking to service the newly wealthy and the local beneficiaries of the shale wealth effect. Their Texas based wealth services offers no in-house investment products or funds, no revenue sharing, and no proprietary trading. It’s also in the process of expanding its services internationally.
On Jan.27, Texas Capital reported stellar earnings with net income up 59% year over year and diluted earnings per share increasing 51% to $3.01 from $1.99 in 2011. Despite that rise in EPS analysts were disappointed, expecting $3.08. Deposits were up (demand deposits up 45%, total deposits up 34%) as were investment loans while the level of non-performing assets decreased.
Currently the stock trades at a 14.05 P/E with a 1.27 PEG.
Drilling Down
Another name is Cullen/Frost Bankers, Inc. (NYSE:CFR) which is the holding company for Frost Bank which operates primarily in two segments: Banking and Frost Wealth Advisors and almost solely in Texas. The stock is close to its 52 week high of $61.68. Cullen/Frost Bankers, Inc. (NYSE:CFR) has a P/E of 15.80 and a 3.10% yield with a payout ratio of 49%.
Founded in 1868 and based in San Antonio the company has 110 financial centers in Texas blanketing these shale areas. During a three year spree between 2005-2008 Cullen/Frost Bankers, Inc. (NYSE:CFR) acquired six Texas banks. The company has been in the news lately as it had an $150 million issuance of non-cumulative perpetual preferred shares to fund a common share buyback worth $144 million. Many investors saw this February 14 announcement as not only an insider vote of confidence but also advancing return on equity.
Their main competition in Texas is the big banks, Wells Fargo & Co (NYSE:WFC), Bank of America Corp (NYSE:BAC), andJPMorgan Chase & Co. (NYSE:JPM) As of 2009 Cullen/Frost Bankers, Inc. (NYSE:CFR) was the fifth largest bank in Texas after these three. Currently it has around $23 billion under management.
Two quick caveats on Cullen Frost- the short interest has been increasing and the PEG at 2.24 indicates it may be overvalued.
High on Hilltop
This last name is for the speculators among you because it has the most risk and possible reward. Hilltop Holdings Inc. (NYSE:HTH) was a frequent underperformer, most recently reporting a loss of -$0.18. But it acquired Plains Capital Corporation turning the former property and casualty insurer into a banker as of November 30 of last year. This purchase was seen as very favorable and led the stock to almost double from $7.75 to $14.49. Insiders have been buying in for the last few months as they are optimistic about Plains Capital, the holding company for PlainsCapital Bank. The Texas bank has $6.3 billion in assets and 34 branches in Texas.
In a March 5 interview for Wall Street Transcript, Sterne. Agee & Leach Managing Director Brett Rabatin mentioned Hilltop Holdings as an undiscovered gem and undercovered by analysts. He also likes the new bank acquisition. Like these other banks Plains Capital has a strong wealth management division and specializes in middle market commercial business and the aforementioned high net worth Texan.
The Bottom Line
Cullen/Frost Bankers, Inc. (NYSE:CFR) is the name to go to if you want a decent yield and the safety of size. Texas Capital Bancshares is a promising prospect with a lower P/E. Finally, for those with a wildcatter spirit, Hilltop Holdings may have more reward if you’re willing to take the risk.
The article Are These Banks The Best Natural Gas Plays? originally appeared on Fool.com and is written by AnnaLisa Kraft.
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