JQP; not trying to get into a P'ing match; but - your formula's ?
First of all; this is in good natured ribbing; you contribute greatly - now Cosmo, I "aint got no use for" fwiw... (VBG). So, let me preface my point here by saying that I think you just may be having a bad "math" day, or your "cyphering" neurons are not clicking on the same wave length today... I respectfully submit that none of us should try to overplay our hands here. Many of us have different "gifts" to offer... Mine is not pure "TA" - I'll leave those comments to marc & Gary among others. For inside the industry perspective - Big Dog, Aggie, Douglas Fant etc. Now, I respectfully submit that ole' Lingerfelt quits practing being an E&P analyst without a "license" (VBG)...
re: << If you divide stock price by CFPS you get "your cost" to acquire each cubic foot of production when you purchase a share. >>
Ahhhhhem; JQP - sir, in all due respect; whatcha smokin today ?
If you divide the stock price by cfps - you do NOT get your cost to acquire each cubic foot of production when you purchase a share. What you do get; is the "BENCHMARK" valuation metric multiple that I mentioned earlier. CFPS multiple - P/CFPS (price to cash flow per share).
ie: ABC Oil co sells for $20 per share and they have $2.00 per share cash flow.
Divide stock price of $20 by $2.00 cfps = 10, which is your price to cfps multiple the "Benchmark" valuation metric that I referred to earlier. This is the Price to Cash Flow Per Share multiple, or P/CFPS - it has nothing to do with any cost multiple per cubic foot, or BOE of production one pays ?
There is nothing reflected in cfps, or the stock price - your 2 variables; for production,or a multiple of it. Now if you did take the total production, or even $ revenue and divided that by the total number of shares outstanding; you would have a multiple , or a valuation metric for "production per share" - or a simple Price to Sales (revenue) multiple.
JQp, the E&P valuation metrics that are used by analysts and the market are different than what is used for the service co's or drillers.
Remember earlier when the drillers were at the bottom and the valuation metric/multiple of Price to replacement value kept coming up ? That was because earnings were absent, or decling rapidly - as were PE's; they were not reflective of the best, or most accurate valuation multiple at the bottom of the cycle; but price to replacement value was, or NAV multiples. In the service companies with massive plant & asset values - Price to Book was a good valuation metric to use.
In E&P's; I would submit that the price to cfps multiple (P/CFPS) is the benchmark; then look to the following:
1.Equity as a % of FV (Firm Value).
Market value +LTD -net cash +pref stock/warrants = FV; divide market cap by FV = Equity as a % of FV
... on this metric; PXD OEI UPR are among the best buys in mid-lg caps
2. This is actually my "hot metric" right now - Earnings per share sensitivity and NAV per share sensitivity to changes in ea $1 in crude oil ,or ea .15 mcf in Nat Gas prices:
For ea. $1 change in Oil, or Gas = what % of sharprice is impacted by the change in earnings:
In crude: PXD shareprice changes 1.3% per ea. $1 change in crude, OEI changes 1.3 %, ETP which has moved nicely of late chanes 2.0%,NEV changes 3.4 %, RGO changes 3.5 % ,- as compared to APC 0.3%, APA 0.5 %, BR 0.2%,VRI 0.3 %.
ea. .15 mcf change in Nat Gas changes earnings to impact share prices by the follow %'s of shareprice: CRK 2.4%, HSE 2.0%,LD 1.6%,OEI 1.1%, UPR 1.0% vs APC 0.3, APA 0.3,BR 0.6, NBL 0.9
Also the same changes in crude change NAV per share by the following %: NEV 47.1% ! OIL 30.7 %, PLX 29.1 %, PXD 21.5%,RGO 17 %, OEi 12.5%. APC 12.0% vs. APA 7.0%,DVN 5.3%, BR 3.9%,VRI 4.2% etc.
*these #'s are a bit outdated; but the leverage is still accurate
You can see what companies are most leveraged in earnings, or NAV to changes in commodity prices - this is perhaps the most important metric presently imho. We've had some companies get sold off in lockstep that should not be this leveraged to changes in commodity prices, or if they are hedged to higher than market prices - then the degree of being oversold to its correct degree of change can be noted. Also, when we turn here and say Nat Gas ramps back to $3; then we can identify laggards who should have bounced more than their peers if they are in reality more leveraged & sensitive in earnings & NAV to commodity price moves.
Price to net asset value is perhaps one of the most valuable and accurate valuation metrics - except that one must know that it is difficult for it to accurately reflect future growth prospects - exploration portfolio upside etc. - ie: APC who allways carries a much higher than peer cfps, or NAV multiple for example. NAV measures the value of assets that are available for management that will provide cash flow for mgmt to reinvest. In E&P's it is paramount in assigning market value, or share value; for mgmt to be able to profitably reinvest cash flow to generate future growth.
There are lots of anomalies that must be noted in using most valuation metrics; if a company just announces a new discovery; they should see those discoveries reflected in their shareprices before they actually see the production and cash flow. Of note - OEI & UPR have made nice recent discoveries - yet are near the bottom of their historic multiple's; their hidden present value has yet to appear in CFPS, or NAV valuation metrics for example, or in any Price to sales, or production multiples; but it will soon !
There are more complex valuation metrics and variations on even those; such as delevered multiples of cash flow - vs. differences in equity only multiples of cash flow - with differeing balance sheets, reserve lives, differing values for exploration prospects impacting the #'s etc. There are FV -to EBDIAt multiples, or debt adjusted, price to cash flow multiple compared to reserve lives etc. - OEI UPR are 2 names here to remember.
Market price per BOE reserves is lowest for PXD EOG NEV RGO & VPI for example. Sec-10 valuations are also used. The SEC requires companies to value their reserves based on using a standardized set of assumptions. There are two variables on this metric as well, pre-tax & after tax.
Another "real life" multiple that should be used; is the shareprices % of the average analysts target price. This makes it easy for the new investor who may not understand for example why APC trades at such a cfps multiple premium to say APA .
You can get as simple, or as complex as you like; but by using CFPS, NAV and comparing the multiples of each; to both the individual stocks historic average multiple range and to its peers; one can fairly accurately guage "value" in the E&P sector. In this volatile commodity price environment - I also use the price sensitivity ratio for commodities as a major factor here. I want to load up on PXD here near $8 as it is among the single most oversold stocks because of its price leverage/sensitivity to crude oil if it remains at these levels compared to its peers. UPR & OEI also are at or near the top of most valuation metric charts as well and again, OEI & UPR have had recent exploration success that is not being factored into these multiples as yet... I also look at which companies have the greatest % increase in CFPS from 1999 to 2000 and which companies will have the greatest % increase in cap ex spending from 1999 to 2000 - this is one reason I love NBL here - in addition to it being at the bottom of both it and its peer's historic sector multiple averages & being less than $2 from a 5 year low...
Lots of ways to appraise a diamond, but - if you expect to sell it to a diamond dealer; you'd better be buying & selling using the same metrics that the dealers do... don't get too creative in forming your own mathematical interpolations (VBG)... too much cyphering can make you go cross-eyed to boot JQP ! |
