Book value is strictly an accounting term, which can be misleading when you look at that for oil and gas firms. The best methodology I've seen for evaluating the intrinsic value of oil and gas firm is to calculate the risk adjusted break-up value, where you used proved and unproved reserves (unproved being risk adjusted), then subtract out the debt.
I also look very closely at cash flow, liquidity, lines of credit being tapped out, etc. A company may post huge losses, like AXAS did, but mostly due to ceiling test write-downs. These write-downs really don't affect reserves in the ground, unless it is because of damaged oil fields, etc.
For many oil and gas companies in 1998, there were huge write-downs because oil and gas prices were extremely low at 12/31/98, and furthermore some fields became uneconomical to produce and the reserves disappeared from the books. Cash flow from operations is really a better gauge than earnings for an oil and gas company. AXAS managed to maintain positive cash flow throughout 1998, except that the last quarter was basically break even on cash flow.
I've seen figures for AXAS of around $14 for risk adjusted break-up value. AXAS has HUGE potential upside if any of their Canadian prospects hit oil or gas.
Another consideration is that if AXAS merged with another firm with deeper pockets, access to credit, etc., shareholder value would be greatly enhanced, as their cash applied to AXAS's prospects would be a winning combination. |
