Ram Energy (RAME) -- I keep waiting for this to pull back ever since Cramer wrote it up, but it looks like it has pulled back as much as it is going to, so here goes.
First, see below a great writeup that Dan Steffens has done on the company at energyprospectus below, plus, if you are not part of the energyprospectus group, also see his latest financial projection at finance.groups.yahoo.com
Dan's writeup:
Ram Energy (RAME) is one of my Sweet-16 Portfolio companies. It was a
member of last year S-16 so I have been following it closely now for
over two years.
I have been working on my Ram Energy model this afternoon and I'm
raising my Fair Value estimate to $10.40/share. See the model
attached for details. I calculate "Fair Value" based on what I know
the company has going right now using my opinion of what commodity
prices will be over the period covered by my forecast model. The
production volumes and commodity prices I've used are shown at the
bottom of each of my models.
Ram is having a mid-year reserve report prepared by their 3rd party
engineering firm. I believe this report will be a catalyst that draws
a lot of attention. It will also reduce their DD&A rate resulting in
higher reported earnings.
Be aware that Ram does have about 50% of their 2008 production hedged
with collars that have ceilings below current commodity prices. They
are listed at the bottom of my model. Mark-to-Market adjustments will
cause reported earnings per share for the 2nd quarter to come in
below the current First Call EPS estimate. My attention (and the
basis for my increased valuation) is cash flow per share ("CFPS").
Ram's CFPS was $0.49 for the year 2007. Per my model, it will jump to
$1.42/share in 2008 and continue on to $2.08/share in 2009. So RAME
is currently trading for just over 3X next year's CFPS which makes it
a very cheap stock (appropriate for Value Forum members).
Ram is currently drilling horizontal wells on its high quality
Barnett Shale leasehold that will generate significant production
growth this year. However, what excites me the most about Ram is
their new project in West Virginia.
The company has staked six drilling locations on its West Virginia
Devonian shale play and initiated drilling early in the second
quarter of 2008. RAM has contracted a rig for its planned 14 well
drilling program budgeted for this year. Previous wells drilled on
the company's acreage have provided much of the science needed to
allow moving to the early exploitation phase. The initial six wells
to be drilled in 2008 are planned as horizontal wells with laterals
ranging from 2,200 to 3,000 feet, aimed at supporting the
commercialization of the company's acreage. RAM has a 100 percent
working interest and operates all of its wells in West Virginia. The
company has budgeted $19.0 million for its 2008 Appalachia program.
Ram has a significant acreage position in West Virginia which could
turn into a major long-term natural gas development for a company of
this size. With the Market locked in "Shale Mania" Ram should draw a
lot of attention when it reports the results of it first few
horizontal wells in the play.
Good luck!
Dan
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Only a few things to add to this great writeup. If you used Dan's '09 projection, which I believe is eminently conservative, Ram is trading at an '09 EV/EBITDA ratio of about 4, and a P/'09 CF ratio of about 3.1. This is an absurd discount to its peers. In the latest RJ Energy Monthly, the average mid/small cap E&P was trading at an '09 EV/EBITDA ratio of 6.1, and P/CF ratio of 7.2.
I believe one reason that Ram has been trading at such an absurd discount to its peers is the fact that it is based in Tulsa, OK rather than Houston. An analyst I know personally has told me that although he likes the Ram story a lot, he doesn't like to pick up coverage of companies that are not located in Houston because it requires him to make a separate plane flight whenever he wants to go visit the company, whereas if they were in Houston he could combine that visit with others. As Ram continues to RAMp up its numbers (pun intended!), the lack of analyst coverage should have less impact to the stock's valuation.
Regarding Ram's Devonian Shale play in W. Virginia, this is on acreage that is surrounded by acreage held by Cabot Oil & Gas (COG), which has already demonstrated the viability of drilling horizontal wells into this shale, with tremendous economics (about a buck an mcf F&D costs). See COG's slide deck, look for their "Hurricane" prospect. All Ram has to do is copy what Cabot has done and Ram can turn this single play into $5/share in value over the next year or so.
Ram has some high-cost debt on its books but they are doing a mid-year reserve report, with the high likelihood that such report will be utilized to refinance said debt at a much lower interest rate. |
