Tulvio, I believe that Value Line Publishes these data, and they are updated every thirteen weeks. You will need to periodically adjust the estimates as new information comes in.
For example, if a company buys a rig for $350MM, and puts it out on lease for 210K/day, you would expect the incremental cash flow generated per day to be around 170,000 assuming 40,000 per day in operating expenses (before depreciation), or $62MM per year. Now, you need to subtract from that number the anticipated financing charges. For example, the company might have borrowed $250MM at 7% and agreed to repay $50MM in principal in each of the next 5 years. So, interest expense during the first year would be $17.5MM and sinking fund outlay would be $50MM for a total cash outlay of $67.5MM which would give you a negative free cash flow for the first year of $5.5MM. During the second year and each subsequent year the cash flow would increase by $3.5MM. Now during the sixth and subsequent years the cash flow would be $62MM per year. So, during the fourth year it would be $5.0MM and during the fifth year it would be $8.5 MM. Now, let's suppose that we expect that industry day rates will climb by 10% per year over the next three years, so that when this rig comes off its lease it will be leased out at $279,510 per day. Assuming that operating expenses have gone up 5% per year, we would have a daily free cash flow of $221,629, or roughly $81MM per year. You will obviously need to adjust these numbers to take into account income taxes.
So, you can see from this hypothetical why there is tremendous potential in these companies provided they don't overbuild rigs, and provided that oil prices don't go so low as to strangle demand for exploration. This is the economic basis for the bullish argument surrounding these companies, and if the Burkes, Cramers and Pissanis of this world can't understand that I think they're ready for brain transplants.
Regards,
Paul |
