Ed,
I just got the 1998 Annual Report (which you may already have - it takes
a while to get to the UK). Some points from it -
1) The general feel is professional and conservative (which appeals
to my British character). HOWEVER, there are many references implying
how undervalued the stock is. The most pertinent is the reference to
the price-to-cash-flow. It says that at $7 (where the stock was), it
was trading on a PTCF ratio of about 2.2; the historic "normal" for
SFY has apparently been 4.0 - 7.5 (I hadn't done any PTCF calcs in my
"stats" analysis of about 8 weeks ago, so I can't confirm this, but
I can easily believe this is the case). You made the comment that the
low PTCF was what attracted you to the stock, so I guess you now have
"official guidance" of what would be normal. Assuming that the stock
were simply to get back to a median ratio, say 6, we should be trading at
close to $20, which is what I have said is my first target price (and is
a little higher than PG's point & figure target of $17).
2) The forward targets are to grow reserves at 15% pa and to grow
production at 25% pa. This is a considerable relaxing of their
previous objectives, but is still significant growth. It marks a
change of emphasis - towards production - but also allows for upside
as budgets allow. The drilling plans are clearly identified for the
budgets that they thought they had. Assuming commodity prices hold
up, it is clear that you will have your wish for more drilling.
3) It is implied that output has been curtailed during the low market
prices - i.e. they haven't been pumping madly to generate cash.
All things considered, I'd say this was a VERY realistic report,
exuding quiet confidence, and stating clearly how under-priced the
stock price is. I think if you do some cashflow projections, then,
based on 25% output growth and today's commodity prices (with plenty
of scope for NG price appreciation), and assuming we get back to
normal multiples, we are looking at a probable four-fold appreciation
in the stock price over the next 2-3 years.
Aren't you glad the market isn't always "efficient"?
Mark |
