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Strategies & Market Trends : Value Investing

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To: Spekulatius who wrote (38972)	8/26/2010 4:33:33 AM
From: Paul Senior	Read Replies (1) of 78470

Your valuation seems to me to combine production and reserves. I like to value the companies both, but separately On their flowing production, and I like to value the companies on their reserves. For reserves I'll take proved and probable barrels. Alternative 2pnpv10 if the company provides it. =========================== If your 100mm boe company lifted 10mm boe and didn't report that reserves were replaced by 10mm boe, that would seem to result in a negative roe number. And if they lifted say 12 mm boe the following year from a 90mm reserve base remaining and still didn't announce new reserves, that would be a further negative both in that roe is negative and the company seems to be depleting itself as well. I view it a a positive though in that the company is increasing its production (flowing production from 10mm to 12). And I just will assume that the revenue generated is either being reinvested in the business or distributed to shareholders. Perhaps your method would make adjustments for free cash flow, but I don't know how to do that satisfactorily. Perhaps what you are suggesting is maybe a good way to evaluate one e&p company against another. We have different interests here. For me, I'm looking for a quick easy method, that while perhaps inaccurate, is good enough. Good enough to cause me to believe the particular company is undervalued. Not necessarily to determine if it's a better value or that it has better management efficiency than any other e&p company. This view can work for me, perhaps not for anyone else though, because I'm willing to hold a couple dozen e&p companies in my portfolio. So I'm not so concerned in limiting myself by picking only what appears to be the best of the best.

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