<<<EPEX has no LT debt, sells for less than book value,>>>
Keep in mind most exploration companies use full cost accounting and EPEX is no exception. Typically, only 40% of wells drilled produce. That means roughly 60% of book value is the cost of digging dry wells on most of these companies. It looks great on paper, but the resale value of dry wells is zero. Capitalizing these expenses as assets skews EPS numbers also, as expenses are only incurred as depletion and amortization. Natural gas prices are close to two year lows and there is a glut of natural gas on the market. To make matters worse, MTBE is on the verge of being phased out, and MTBE is made from methanol, which is made from natural gas.
I'll give the company credit for zeroing out debt while natural gas prices were at historic highs. With very few exceptions, it's rare to see debt to equity ratios much less than 2 to 1 in oil or oil services. Most of these outfits only source of cash flow is debt or equity offerings, with the main purpose of the business being an excuse to glom onto public money. Unfortunately, if we see anything in the way of recovery in the economy, it's going to have to come at least in part from lower energy prices. I don't think EPEX is a bad pick, but I do think energy stocks are headed toward a prolonged bear market. Capital spending in the sector has all but dried up, and rig count in North America has been falling off steadily since the end of summer. |
