Forecaster
I was trying to be as "polite" as possible, but I think maybe I failed. I am sorry, somehow the printed word, when I am typing, sometimes comes out a little harsh. I was not trying to "single" you out, not at all. I am merely attempting to draw to readers attention how, with a simple "stroke of a pen", during the evaluation process, erroneous results can quickly happen. (Which I believe you too were doing.) Then, with error compiled on error, valuations that have no bearing on reality are built and relied on.
In many respects, I am of the same school as Mr. Hickman. We cannot use (and I realize you did not intend so) "North American rules of thumb" when evaluating a play in Kaz. We cannot rely on the valuations that appear to work for Exxon, and transfer them to Hurricane. They are such different companies, I believe everyone can agree on that.
I am somewhat loathe to publish my "valuations", because my assumptions are just that, mine. I do not want someone to say, "Well, FoxyLoxy says it is worth $8, so I will buy it because it is now $7.25." I have been wrong before, and I will be wrong again. My values will constantly change based on new information and my interpretation of them. What I do know, however, and am willing to share, are "basic valuation principles" to help others move in the right direction. Oil and gas valuations are a little different than say, manufacturing. (Though, they do manufacture oil and gas.) There is great volatility in commodity prices, oil and gas fields have natural rates of decline (which vary from field to field and zone to zone), this Company will be subject to serious political risks that can manifest themselves in many different ways, etc. I am sure, if everyone thought about it, they could think of many issues that Hurricane must face in Kaz that some little 1,000 barrel a day company in Calgary does not ever face. This is Mr. Hickman's point. In fact, what we normally take for granted, a level and fair playing field, now becomes the number 1 focus of our valuation work. Nobody can convince me (nor Mr. Hickman I am sure) that dealing in Kaz is not the primary concern. The "business of oil and gas" is actually secondary. Like peeling an onion, we dig through layers. The outer layer, its protection, is conveniently removed for domestic Companies. That does not mean it is not there, it is, we just take it for granted. The Kaz environment could change, overnight, but it surely would not deal a serious blow to Chevron. Chevron would overcome, likely even rectify the problem for themselves. Minimal stock impact over the medium term. It could kill Hurricane.
The political climate will set the tone of the valuation work. Firstly, what rate of return is sufficient to reward equity holders when considering the risks facing Hurricane? This "rate", coupled with the cost of debt (16%) will be weighted to derive our cost of capital - this new discount rate will be applied to future cash flows to determine value. Mr. Hickman probably believed the recent issue was a "Canadian one", and therefore within his investment tolerence level. That has now been lifted, and as he stares at Kaz, he has determined the risks are now too high to be adequately rewarded. (is this the case?) I believe Mr. Hickman is being completely rational. But so too are those that are still invested. It will depend on your risk profile and your corresponding expectations. For me, I believe that a rate of return around 50 - 75% per year for equity is in order. Anything less, and I can do better elsewhere. (on a risk/reward basis) If Hurricane was operating in Alberta, this stock would have a completely different complexion. But, then again, it would not have the opportunities it now has.....
Respectfully
FoxyLoxy |
