Below is a somewhat jumbled copy of a research report on KCS Energy (KCS), which is a great play on natgas prices IMO:
KCS Energy Inc. (KCS/NYSE): New Credit Facility Complete: Upgrading to a Buy
Irene O. Haas (713) 250-4235; Irene.haas@smhhou.com
Stephanie Joe (713) 220-5139; Stephanie.joe@smhhou.com January 16, 2003
Industry: Energy Industries Recommendation: Buy
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Price: $2.49 Price Target: $4.00 Type: Change in Recommendation
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Estimates (Dec.) 2001 2002E 2003E
Curr Curr Prior Curr Prior Investment Profile Q302
EPS (Diluted) $1.69 ($0.15) $0.68 $0.77 Share Base (mm) 36.2
P/E NM 3.7x Market Value ($mm) $90
CFPS (Diluted) $1.77 $0.57 $1.26 $1.36 Cash ($mm) $10
P/CF 4.4x 2.0x Long Term Debt ($mm) $134
EBITDA ($mm) $80 $35 $64 $65 Preferred $13
EV/EBITDA 6.5x 3.5x Enterprise Value ($mm) $227
Dividend Rate Nil % Leverage 119%
Dividend Yield Nil Inst’l Ownership 25%
Daily Trading Vol. 932,100
Price Range (52-week) $4.01 -
$1.14
Erngs. Per Share 2001 2002E Prior 2003E
Q1 1.21 (0.03) (0.03) NA
Q2 0.48 (0.38) (0.38) NA
Q3 0.22 0.09 0.09 NA
Q4 -0.11 0.14 0.14 NA
Cash Flow 2001 2002E Prior 2003E
Q1 1.18 0.07 0.07 NA
Q2 0.43 0.13 0.13 NA
Q3 0.23 0.17 0.17 NA
Q4 0.07 0.19 0.19 NA
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Please refer to smhhou.com for important SMH disclosures. The valuation methods used
by SMH to determine the price target for this security, along with the risks, are detailed within this report. If any
hyperlink is inaccessible, please call 800-423-9656 and ask for the Research Editor.
KEY POINTS
• KCS announced yesterday that it has completed its financing. The existing credit agreement was amended and restated, and
will provide $90 million in borrowing capacity, a $40 million term loan and $50 million in revolving facilities maturing on
October 3, 2005. Proceeds of $69.3 million were used to pay off the note obligations, leaving $20.7 million of availability.
One-third of the facility bears an interest rate of LIBOR plus 2.75% to 3.0%, or prime plus 0.5% to 0.75%, depending on
utilization. The other two-thirds of the facility, which can be pre-paid without penalty, bears interest based on the prime
rate, equal to 9%, and increasing annually.
• In our opinion, the completion of the financing is an important event. KCS can once again turn its attention toward drilling
wells and finding oil and gas. The company has set an initial capital spending budget for 2003 of $45 to $50 million. With
a favorable commodity environment and more funds available for drilling, KCS should be able to return to profitability with
the major hurdle of the financing now behind it.
Sanders Morris Harris: KCS 2
• The company also expects to produce 31 bcfe to 35 bcfe in 2003, of which roughly 6.8 bcfe (20%) is allocated to production
payment. This is in line with our expectation. Lease operating expense will range from $22 million to $24 million; G&A
will be $7.5 million to $8.5 million for 2003. Interest expense of $19 million to $20 million is slightly higher than our
previous estimate. We are revising our 2003E EPS estimate to $0.68 per share and our cash flow estimate to $1.26 per
share; our previous estimates were $0.77 and $1.36, respectively. KCS should generate roughly $50 million in cash flow,
sufficient to finance its capital spending in 2003. We are very encouraged by this positive development; therefore, we are
raising our recommendation to Buy from Hold.
Company Profile
KCS’s primary focus areas are the Mid-Continent region and onshore Gulf Coast. The company has key operations in the
Anadarko and Arkoma basins, North Louisiana, West Texas and Michigan. Along the Gulf Coast, the focus properties are in
South Texas, Coastal Louisiana and the Mississippi Salt Basin. KCS Energy devoted most of 2002 toward the redemption of
the $61.274 million Senior Notes due January 15, 2003. The company sold assets and slashed its budget to conserve cash.
Now that the financing is over, we believe the company will began to ramp up its drilling program in 2003.
Table 1: Revised Estimates
Current Previous
2002E EPS ($0.15) ($0.15)
2002E CFPS $0.57 $0.57
2003E EPS $0.68 $0.77
2003E CFPS $1.26 $1.36
2002E Basic Share Base (million) 35.83 35.83
2002EWTI ($/bbl) $26.06 $26.06
2002E Henry Hub ($/mcf) $3.35 $3.35
2003E WTI ($/bbl) $26.00 $26.00
2003E Henry Hub ($/mcf) $3.75 $3.75
2002E Production (bcfe) 37.50 37.50
2003E Production (bcfe) 35.41 35.41
2002E Production Growth (19%) (19%)
2003E Production Growth (6%) (6%)
2003E All-in Cost ($/mcfe) $2.88 $2.77
2003E Cash Cost ($/mcfe) $1.58 $1.47
SMH estimates
Valuation and Price Targets
In valuing our E&P companies, we use a price-to-cash flow multiple. We establish a reasonable range based on historic
averages of a group of broad-based E&P companies, which includes ten E&P companies with market capitalizations ranging
from $900 million to $10 billion. Our 12-month price target of $4.00 is based on 3.0 times our 2003 cash flow per share
estimate of $1.26. We use a low multiple to reflect KCS’s high leverage.
Investment Risks
• KCS has a small market capitalization, a relatively thin float and light trading volume, which, under certain circumstances,
could make the stock more volatile.
• The company’s production mix is roughly 79% natural gas: with each $0.10/mmbtu change in Henry Hub natural gas prices,
both 2003E EPS and CFPS could be impacted by $0.05 each. Also, with each $1.00/bbl change in WTI oil price, the 2003E
EPS and CFPS could both be impacted by $0.03. In addition, the high debt level makes KCS more sensitive to positive or
negative outlooks on U.S. natural gas prices.
Investors should assume that Sanders Morris Harris is seeking, or will seek, investment banking or other services from the covered companies.
The analyst(s) responsible for preparing this research, received compensation that is based on various factors, including SMH’s total revenues, a portion of which is generated by
SMH’s investment banking activities.
Sanders Morris Harris: KCS 3
This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who
receive it.
Sanders Morris Harris Group's Ratings are defined as follows: Strong Buy: We anticipate 20%-plus price upside over the next six months. Buy/Outperform: We anticipate 10%-
20% price upside over the next 12 months. Hold: We believe the stock is fairly valued at current levels. Sell/Underperform: We anticipate the stock price will decline from current
levels over the next 12 months.
Copyright 2003 Sanders Morris Harris Group. The study herein is not a complete analysis of every material fact respecting any company, industry, or security. The opinions
expressed here reflect the judgment of the author at this date and are subject to change. Facts have been obtained from sources considered to be reliable, but are not guaranteed.
Sanders Morris Harris, its officers, directors, and/or employees may have an interest in the securities of the issue(s) described herein and may purchase, sell, trade or act as market
maker while this report is in circulation.
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