After a month or so of the oil bulls and bears fighting it out, oil
seems to be back in the $16 region. In the similar period, NG prices
have also strengthened, but not by as much, presumably due to concerns
over inventory levels. Prices for NG have risen from a low of around
$1.70 to current levels in the region of $2.10. Had these tracked oil
at the ratios of recent history; i.e. 6.5 to 1; then we would expect NG
to be in the $2.45 region.
We are awaiting SFY's first quarter's figures, which will hopefully be
the last of the quarters to be adversely affected by poor market
pricing. For the last published figures (Q4 '98), SFY achieved market
prices of $2.00 for NG and $11.74 for Oil. We will shortly have the
figures for Q1, and it is likely that they will be based on similar
prices (perhaps slightly lower). I therefore wouldn't be at all
suprised to see numbers below the 19c that they achieved last quarter.
However, going forward, things look increasingly optimistic. A
simplistic calculation can be made for SFY's profitability based on
SFY's last quarter's output being maintained, but being sold at
current pricing. (This may or may not be a pessimistic scenario).
What is interesting about this calculation is the effect that the Sonat
acquisition has. (This has increased the proportion of output based
on oil to around 35% of the total). Under the current scenario, where
oil prices have strengthened disproportionately, this has an extremely
beneficial effect. Should SFY be able to sell their oil at $16, then
this would add about $3m to their quarterly profits and would increase
quarterly EPS from 19c to 36c. In other words, the rise in oil prices
ALONE, could drive SFY's '99 profitability well above the $1 region.
I am reasonably optimistic about the prospects for oil pricing, but
less clear about the prospects for NG. I am hopeful that these will
strengthen, and that at some point we will again see the 6.5 (or lower)
ratio restored. Should NG rise well above the $2 that SFY achieved in
the last quarter then this will also have a beneficial effect on
profitability.
One thing that does concern me however is how much SFY have reined-in
their drilling expenditure. They'll probably need to increase this
spending significantly if they want to grow their reserves and output
at their previous rates. This will cost a lot.
Should NG pricing continue to strengthen, I am hopeful that SFY will
be generating enough cash to provide good profitability AND increase
their drilling spending. The basis for this will be the strong platform
accorded by the high oil production, and increasing market prices.
On this basis, the Sonat deal could turn out to have been a
an extremely valuable move.
Within this context it is probable that we should begin to see
some upwards earnings revisions. I am presently hopeful that SFY will
achieve >$1 this year, and it would be encouraging to see this reflected in
analyst estimates. I also suspect that these might yet take a week or
two to appear, given that we are close to the next quarterly report,
and that the institutions will need to load up on the stock first (!)
Mark
p.s. RTQ and I are in agreement over the relative risks of techs vs.
O&G, so it was interesting to read that Fidelity have reduced their
tech exposure over the last few months.......
dailynews.yahoo.com |
