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Gold/Mining/Energy : Canadian Oil & Gas Companies

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To: Kerm Yerman who wrote (5521)	10/23/1998 3:51:00 PM
From: Kerm Yerman	Read Replies (2) of 24892

All / Added Probe Comments 1997 year-end net asset value for Probe was $3.50/share. I don't expect any reduction in assets over the next 12 months and I am also under the belief that they will work within cash flow. Reserve growth has grown 7X over the past three years. Probe's production level has grown from 400 boe/d in 1996 to an exit rate of 8,500 in 1997. I expect the company to exit this year with 14,000 boe/d. Average production for 1998 should be 10,000 boe/d. 1999 forecasted production is 15,500 boe/d. The 1998 & 1999 estimates have been factored downward from earlier estimates. These revisions are attributed to both logistical delays and to higher than anticipated declines in the production from the Sparky formation. This Sparky production is expected to ramp back up with the full implementation of the waterflood. The waterflood infrastructure is all connected and is currently being tested. We expected it will take three months before the full impact of the waterflood is shown on production. This growth has allowed Probe to achieve economies of scale and drive down operating and general and administrative overhead costs on a per unit basis, resulting in strong operating netbacks. Net debt (long term debt + liabilities based upon 1998 forecast is around $120 million. Maintaining debt at the current level over the next 12 months would result in the company having a 12-month forward debt to cash flow multiple of 2.1X (12 months from now). This multiple is in line with their peers. This debt has been factored in the share price estimate I had declared in my previous post. As the oil scenario improves, the debt to cash flow multiple will improve. I based my 1998 numbers on $15.00/bbl and 1999 on $17.00. At a steep discount to net asset value and with shares trading at only 2.4X 1999 cash flow, Probe offers an exceptional opportunity for above average return on investment. I believe there are three major factors that are holding down share prices. (1) Recent downgrade of original production estimates of which I believe are only temporary (2) High debt resulting in a high debt to cash flow multiple which I believe will be worked down substantially over the next 12 & 24 month periods. (3) Currently crude leveraged in a bad pricing environment which will also improve substantially over the same periods as noted above. In 1999, I expect production to be split about 62% liquids and 38% natural gas.

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