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Gold/Mining/Energy : Strictly: Drilling and oil-field services
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To: Broken_Clock who wrote (16536)3/25/1998 6:58:00 PM
From: Chuzzlewit  Read Replies (1) of 95453
 
PK, the real key will be long-term interest rates, not the discount rate (although that has a definite effect); nevertheless, it's something to be concerned about.

Now, as to the debt issue. I the companies have issued bonds, the interest rates are generally fixed, but if the debt facility is from a bank it is generally a floating rate of some sort (though the terms vary). IMO, the real issue in the debt equation is safety vs. the leverage effect of using debt to expand vs. equity. Would you rather have your favorite driller expand by merging with one of its peers through a pooling of interests (and pay approximately a 25-30% premium over market for the privilege) or borrow via bonds and run the risks inherent with leverage.

To my mind, when a company chooses to expand using bonds as ESV did recently, its a bullish sign because it says to me that the company views its stock as "undervalued".

Regards,

Paul
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