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Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: Gary Burton who wrote (50214)	9/1/1999 1:40:00 PM
From: double-plus-good	Read Replies (1) \| Respond to of 95453

Gary is there a new SSB report on CRK? I don't recall their following Comstock. That they have initiated coverage is encouraging in some respects. I think that the end of hedging during this quarter bodes extreme;y well for CRK. My position (very large) is complete and i'm looking for a figure closer to 7 before i unload half of it. ++good

To: Gary Burton who wrote (50214)	9/1/1999 2:28:00 PM
From: SliderOnTheBlack	Read Replies (1) \| Respond to of 95453

GaryB; re: SSB's valuation of CRK... Absolutely; the higher debt companies, or one with a significant risk factor will be given lower multiple valuations. But; I think SSB is conservative here; especially since CRK has supported much higher valuations that their current target price as recent as last fall. An incredibly important concept here is that Q3 will be the first reporting quarter where most of these companies show any significant rise in cfps, earnings and higher realized crude & gas prices than last year. That upside surprise will drive analysts to expand multiple valuations. These cfps & NAV multiple valuations are historic valuations; no new ground needs to be broken to obtain those value levels. All that needs to happen is for these companies to post the #'s to move the analysts. Remember; virtually no one is using more than $17ish crude Oil and $2.25 Nat Gas in their earnings & valuation models - much lower than present prices ! RRC for example showed a nice 35% + production increase - outstanding; but they showed realized Crude prices of only $12.94 and Nat Gas prices of $1.94. - these were hedged in the days of $8-10 Crude & $1.64 nat gas; so how ''bad'' were these decisions in reality ? RRC merely locked in hedges at the bottom of the market, guaranteeing their survival and as a requirement of their Bank Group. Now when RRC realizes over a 50% increase in both Crude & Nat Gas prices going forward from the historic lows; what do you think that is going to do to both their individual numbers - but also to the expansion to merely normal sector valuation multiple levels. With 2-3 quarters of these companies hitting and/or surprising to the upside; then analysts will be comfortable in expanding the multiples to the mid, or even upper end of the multiple range. Again; it is not as if these companies have not been valued there before... ie: RRC's (Lomak)target price of $28 from late 1997 - going into 1998. If we are indeed in the early stages of a 1-3 year Olilpatch boom; which we certainly look to be; then we should reach the mid-range of the multiples in early 2000 - and see multiple expansion as earnings & revenue and commodity prices dictate going forward from there. It is a guess - to try to calculate when they would reach the high end of the multiple range; perhaps 18 mos. into a recognized sector expansion - similar to the valuations of late 1997; after a 18 month sector expansion... For the E&P's - we are arguably 6 mos. into the expansion, or just entering... so we are perhaps only 3-6 mos. away from the mid-range of multiple valuations; and perhaps 12-18 mos. away from the peak valuation levels imho... The amazing discipline that these analysts have is a good thing; They allready know - being 2/3rds of the way through the quarter - where these companies will be at the end of Q3. In RRC's case; realize they had a MAJOR financial inspection here by their entire Bank Group - in a redetermination of their borrowing base. They got a financial-proctological exam - guaranteed. The banks would not have; #1 - given them the extension if the Q3 numbers - price realization & cash flows were not significantly improved and positive; and #2 - they would not have given the extension unless they were assured by BOTH First Energy and RRC that the JV was a done deal... these were the major hurdles for RRC and the reason for the heavy, heavy shorting of late. Given; the logical - and not irrationally exhuberant conclusions that an inquiring mind could make from this situation with RRC; one could extrapolate what the 2.5 million short shares - nearly 19 days of trading volume to cover; would mean to the nearterm upside - regardless of any valuation changes by analysts. Thus, imho - it became a gift- horse trading opportunity here; with multiple upside catalysts - both fundamental & technical. RRC is trading at 1.5 - 1.67 x cfps; so the upside is significant; merely in moving to the bottom of the valuation multiple ! At the bottom of the historic multiple range - 3 x cfps; RRC carries a value presently of $9 per share. Deutsche Banks call for $10 is hardly aggressive - they were merely and very admirably, the first to pound the table and to run the #'s on what the JV would do for RRC. Even using SSB's present multiple for peer CRK of 2.6 x $3.00 cfps = $7.80 - over 50% upside from prices of late for RRC. In RRC's case the elimination of the Bank Group's borrowing base redetermination risk and the closing of the JV will lead to surely - the bottom multiple of say CRK here... hence my feeling that a run to $7+ is literally a chip shot for RRC. Multiple expansion comes with upside earnings surprises from the quarterlies. Theses companies must hit & exceed the estimates - when they do - they individually get rewarded. When the entire sector does - the sector multiples get expanded. Remember; all the analyst comments on what Big Oil, the Integrateds and the Independant E&P's are expected to do - come Q3 reporting... upside surprises accross the board from 29-30%. That will lead to multiple expansion, analyst upgrades and rising price targets; and that will start the first major rally based upon the actual higher realization of present commodity prices - and not merely expectations. The next rally will have ''real'' legs imho. For these debt laden small & micro cap E&P's - they have yet to really post a quarterly that proves in black & white; that they are indeed out of the woods. Q3 will be the first - and with sustained Nat Gas prices over merely $2.40ish & Crude over $18- the upside to just cash flow & earnings is substantial and the ability for multiple expansion is the 2nd catalyst for their huge unrealized upside potential. Again; nearterm - 3-6 mos/the next 2 reporting quarters; the E&P's have vastly superior bottomline fundamentals than the driller & service stocks imho - but, then a transition and an eventual reversal of fundamental momenteum will take place. Remember - that $24 Oil in November - gets a drilling contract that will not start earning money for the driller untill perhaps February. So the E&P company reports huge numbers in January from the Novemeber crude prices and its stock reacts - where the driller will not receive a $ of benefit untill February and will not be able to report it untill April... that lag in the bottomline realization of higher commodity prices endorses imho; that the E&P's are the place to be in the early stage of Boom 2000.... time will tell.