Steve/Floyd - I think we have a lot to be very bullish about. The
stock has moved up nicely over the last two weeks, and there's still
a lot more to come. I think we took a pause for profit taking on Friday,
which was probably catalysed by another day of weaknesses on
the NG futures market.
Unfortunately we are still very much in the hands of Oil prices, though
I think there is increasing optimism that some realistic cut-backs will
be agreed in the next week or so, and that oil prices will strengthen.
I thought I'd research the historic data on the Oil and NG prices
received by SFY. What I learned, unsuprisingly, is that SFY have
received a whole range of different prices over the years. However,
there have been some very clear trends affecting the relative pricing of
the two. In the late 80's it looks like nobody wanted NG, and oil
traded at about 10x NG. However, since a peak of weakness in 1990,
where the oil prices SFY received were 13x NG, the ratio has moved
consistently, to a low of 6x for last year. I assume that there are a
number of reasons for this - increasing demand, increasing environmental
benefits, SFY having higher quality gas, etc.,
The AVERAGE relationship over the last 5 years has been 7.3x, with the
trend suggesting that 6.5x would be an appropriate ratio to use at the
moment. On this basis, if oil agreements are reached, and oil
prices stabilise at $15, the price of NG should rise to around $2.30.
At these levels, a "fair value" for SFY is around $23.
This assessment of course ignores the specific supply/demand considerations
of the NG world - i.e that there are high NG stock levels at the moment,
and that in the longer term it seems quite plausible that NG will find increasing
favour as a fuel. However, regardless of what happens in the longer
term, it certainly seems that in the short term NG has some appreciation
due - the price of Oil has strengthened disproportionately in the last few days.
Assuming that NG and Oil do continue to strengthen, it should all have
a significant effect on SFY's revenues. SFY are currently dependent on
the market prices of both. (Last quarter's figures shows 1/3 of output
revenues came from oil).
It might be too much to expect market prices quickly get back to
the heady levels of 96/97 (SFY oil at > $17.50 and NG around $2.60),
but it seems very possible that this might happen over the next two
years. If it were to do so, the potential for SFY would be dramatic.
I think that what excites me most about the potential for the stock
is simply the way that events over the past two years have set-up
such an amazing opportunity. If I am right then we have two main
considerations -
1) SFY is unfairly beaten up. SFY peaked in price at just over $30
in January 1997. The start of the substantial decline (which commenced
in Q3 1997) was a downgrade by the Prudential analyst. However, in the
susbsequent 18months we have had a collapse in commodity prices, a
massive change in sentiment against O&G stocks, unsubstantiated
allegations about the company's reserve situation, significant short
activity, write-down of reserves, etc., Each of these events have
been significant in isolation, and the cumulative effect has been
devastating. It seems hard to believe that the company that people
were happy to value at >$30 is the same one that has recently been
valued at around $5.
2. Underlying growth in the company has continued as normal in the
last two years, and has been totally ignored. In the same time that
all the **** has happened, SFY has just got on with doing what it
does - building reserves and increasing output. It has done so at the
same high rates that it achieved in prior years - approx 23% per annum
(per share). Furthermore, the market in the same time has also moved
on to value "growth" stocks at higher multiples.
We now have the interesting prospect of responding simultaneously to
both of these factors. In effect we are now not just seeking a
recovery to the ascribed values of Jan '97, but we are looking to
develop a potentially higher valuation based on where the company is
now (and will be in the future). We're simultaneously playing catch-up
to where we were AND chasing a newer, bigger target (based on where the
company has moved on to in the mean time).
Imagine what would happen if you went to an average tech stock investor
today and said "I know of a company that has demonstrated consistent
annual growth of 23%, and which is likely to continue growing at this
rate. It is likely to earn about $1 this year, >$1.50 next year and
probably >$2.25 the year after. What do you think it is worth ?"
I'd guess they'd conservatively say $20 by next year, $30 by the year
after and $45 the following year. If you then told them that the growth
was contingent upon one thing (the price of a market commodity which
could easily be tracked), and that the cost of this opportunity was
presently <$7.50, I think you'd be trampled to death in the rush.
We are not so far away from this happening. There are a lot of small
investors these days who understand enough about market economics
to know that the risk:reward in techs at the moment is uncomfortably
high, and for whom the above proposition would be irresistable.
Mark |
