First of all, I look at cash flow from operations first. Earnings and book value can be rather misleading for oil and gas companies.
Secondly, the reason earnings last year were so low is due to write-downs caused by low commodity prices. Oil and Gas accounting is rather quirky. I prefer to take the PV-10 value, update for realistic oil and gas prices, add hard assets such as land, facilities, etc., then subtract out debt. If you look at AXAS that way, then the intrinsic value is more like $5/share based upon the 12/31/98 PV-10. Using today's commodity prices, this is probably more like $8 - $10/share.
As for debt, yes that does concern me. However, AXAS has met all debt payments, had positive cash flow from operations last year in the depths of the industry bust cycle, and likely will have much higher cash flow from operations this year with higher commodity prices. If we were to return to the ultralow commodity prices again for a prolonged period of time, AXAS might not ride that out. However, that doesn't appear likely, though the price reflects concerns about BK.
AXAS also has a huge inventory of high potential prospects. As long as management can keep the debt under control and spend some CAPEX for drilling, AXAS could really fly. AXAS is an extremely lean operator, with very low operating costs except for debt service. |
