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Gold/Mining/Energy : Big Dog's Boom Boom Room

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To: upanddown who wrote (96536)	2/7/2008 8:36:41 PM
From: Ed Ajootian	Read Replies (1) of 206209

John T., Edge Petroleum (EPEX) -- I looked at this again briefly today after the news but have decided to continue to shun it. I do best when I latch on to companies whose managements are achieving some success in the field and such success is being undervalued by the market. Not sure that you can just value the reserves in some sort of vacuum, without considering the financial posture of the seller. Their debt is now up to a whopping $1.50/mcfe and that is getting into the danger zone, IMO. If you ignored the capital structure you would probably come up with a value for the reserves that exceeds what the market is putting on them now. However, to ignore the capital structure of the company would be a huge mistake, the value of the reserves needs to be discounted because of the financial distress of the seller. You are using faulty logic to divide the market cap of a company by the amount of its proved reserves and attempt to use that metric in any useful way. That metric is worthless because it omits consideration of the other parts of a company's capital structure. For this reason, folks instead take the entire enterprise value and divide that by the reserves, which in this case produces a value of about $2.42/mcfe. I believe Gulf Coast reserves are going for prices in excess of that price but as I say above, I think in a situation where the seller is basically forced to sell out I think a discount ends up being placed on the value of the reserves being sold. I believe EPEX may need to record a full-cost ceiling writedown for 12/31/07, or if they don't they will be very close to that point. The cost of their oil & gas properties as of 9/30/07 was $708 M. Let's say that stayed the same for 4Q -- that would mean their book value of their oil & gas properties (prior to consideration of any needed writedowns) is $4.31/mcfe. Not sure that the SEC PV10 value of their reserves would come in at that high a price. With a reserve writedown, query whether that might trigger a debt covenant. I believe there are plenty of other stocks out there that are being way undervalued by the market, which lack the obvious clues of mismanagement that are present with EPEX. One such stock that I am buying right now is Linn Energy (LINE). They too are heavily levered (about a buck an mcfe) but so far they seem to be doing some good things in the field.

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