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Gold/Mining/Energy : Canadian Oil & Gas Companies

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To: Kerm Yerman who wrote (5099)	5/27/1998 3:32:00 AM
From: Kerm Yerman	Read Replies (1) of 24921

Richard / Commodity Pricing Whoops, I screwed up in completing last message. Here is complete message. Richard I agree that companies should be factoring lower crude estimates compared to what they were using back in March. Based upon most new estimates, $17.00 bbl seems to be the popular number. I think $16.00 is appropriate if applying round numbers - maybe $16.50 to be specific. Year to date thru 5/22, WTI Crude has averaged $15.66 per bbl. We're now at $14.82. Assuming the price of crude by July 1 reaches $16.00, the average price for the last six months would have to average about $18.25 in order to meet the $17.00 annual average most companies have been using. I don't see that happening. As I have indicated prior, dominate oil producers are good investments at this time. Those companies whose shares have been beaten back because of the oil pricing environment are attractive investments at current prices. I emphasize "beaten back due to the current oil pricing environment". There are fundamentals which must be considered. A company must still reflect growth in terms of production and reserves and such growth must be realized through internal drilling programs. Beware of those companies who have made marginable acquisitions over the past 12-18 months. In addition to growth provided internally, one must also factor in the extent of debt a company is carrying. It's important to get a fix on an estimate cash flow to debt ratio (12 months forward) come 1998 year end. Basically, without repayment of debt, most company multiples will increase by year end. If a company can increase cash flow per share this year without experiencing an increase in the CF/Debt multiple, consider that to be a very successful 1998. In regards to natural gas, it would appear the most popular estimate is $1.85. I tend to agree with this estimate. It will be interesting to see where the Canadian price is at come next January. As far as which commodity is better leveraged at todays prices - I firmly believe both offer about the same value. Gas pricing has been under seige for a while and those companies leveraged to natural gas have had shares fall back in value and there is probably a little downside yet remaining. Nothing to worry about at this point in time. Successful investing in todays market environment demands that one must recognize value. Such value investment results buying into industries currently not popular with the mass investment community with the concept that the investment environment will improve over the near or intermediate term. It's fairly easy to say this will be the case with companies in the oil & gas industry because it is commodity driven and such commodities are at historically distressed levels. I would strongly urge trading out of industries with historically high PE multiples and move into the oil's.

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