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Strategies & Market Trends : Value Investing

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To: Paul Senior who wrote (41099)	1/19/2011 10:02:19 AM
From: E_K_S	1 Recommendation Read Replies (1) of 78670

Hi Paul What's you long term exit strategy for the oil stocks you have been accumulating? Specifically those that are of the small cap variety, do not pay any type of dividend and/or are hard to determine their fair value. One of the determinants to calculate fair value is the price of oil and NG. With oil approaching $100/barrel I see limited up side to the commodity w/o affecting overall world demand. NG is another case as IMO it is a reversion to the mean play and could rise another 50% just to get to it's long term historical avg price. Valuation for many of these small cap E&P companies is difficult and can be influenced by company specific events. Several of the big winners are the result of profitable lease holds located in rich oil/NG areas, getting large JV partners to help finance & develop wells, building up proven reserves and/or gathering operations so sustainable income streams can be produced, low historical interest rates needed to finance E&P operations and generally high Oil & NG prices. Even with the best due diligence there are still valuation surprises. For example Samson Oil & Gas Limited (SSN) retained a 3.8% overriding royalty interest for the Niobrara acreage they sold to Chesapeake. So not only did this sale provide immediate liquidity to develop the oily section of their Niobrara holdings, but it also provides cash flow from operations as Chesapeake pays a royalty to Samson. Therefore, I guess my exit strategy on these will be based on (1) holding period one to three years, (2) price of Oil & NG compared to avg historical prices (peel off shares when prices are high), (3) the successful development of proven reserves and (4) minimal debt leverage when compared to net income and free flow cash. FWIW, many of the new lease holds terms now contain a royalty over ride for the term of the lease. Many of these specific terms are not disclosed in the SEC filings. You have to ask the companies if they have any (on their large sales and/or purchases). It's a nice surprise when you find out that they retained these interests. It makes it easier to hold these companies that have these hidden assets vs the others that continue to spend money and accumulate debt drilling dry holes. EKS

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