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Strategies & Market Trends : Strictly: Drilling II -- Ignore unavailable to you. Want to Upgrade?

To: gold$10k who wrote (5621)	12/20/2001 10:58:34 PM
From: isopatch	Read Replies (3) \| Respond to of 36161

Some ideas about evaluating energy E&P companies vt. You're using some good screens. So I'll just offer a few suggestions. Industry people and the better energy analysts put a lot of emphasis on the the price to cash flow ratio (stock px/ current qtrly cash flow X 4 to est 12 mo cash flow). when comparing companies with that number instead of P/E ratios. Also worthwhile are price/sales and price/book ratio derived from the most recent qtrly report. Although I don't do it, perhaps someone on the thread would volunteer to set-up a spread sheet ranking E&Ps of all cap sizes by the P/CF ratio, then add the other ratios, along with balance sheet stats, reserves, annual production growth (or decline) and forward earnings estimates from left to right with a row assigned to each company. All that data condensed onto one or two pages is a powerful tool with a lot of focus. After some study, you begin to see how the various characteristics of each company come into the total valuation picture. Going beyond the valuation spread sheet: Sometimes a P/CF is attractive, but reserve life is short or there are severe legal challenges, etc. We've all run into a variety of sometimes unexpected company specific problems that end up telling us the attractive P/CF number means the stock is cheap vs being a good investment value. One of the things I find most often gets glossed over, if not ignored entirely, by investors is the balance sheet. I'm a little on the conservative side and don't like a lot of debt. CRK with about as much total debt as equity is OK. But that's generally as far as I'm willing to go with leverage on the balance sheet. To get a more detailed overview of the financial strength of the company I'll always look at the most recent balance sheet. (from Yahoo a/o end 3rd qtr. SI company figures are a qtr or more behind) biz.yahoo.com Key here is stockholders equity is still quite sizable. So I'm comfortable with eventually building a large position in CRK. If it were significantly lower because of liabilities that don't show up on the quick and dirty company profiles many folks limit their DD to, I'll reject the stock. As you can see, PQUE has a somewhat stronger balance sheet biz.yahoo.com And stockholders equity is almost as much as total liabilities. Then there's EPEX. Although the smallest of the three, it's the strongest financially. As can be seen Stockholders equity is over 10 times total liabilities. biz.yahoo.com And this review also shows something else that's very important. Is stockhold equity growing? Mgt can talk all they want about adding stockholder value. But here's their report card. Did they "walk the walk"?<G> Finally there's a more subjective area that I usually spend more time on than ratio analysis, once I've screened the company for financial strength. It basically amounts to asking - "how good are these guys?" Do they have an excellent vs an average record of finding the resource? From what's been publicly disclosed in their operations reviews what conclusions can we come to about the quality of their geology and engineering staff? And do they appear to have a good portfolio of prospects for continued exploratory and developmental drilling? Or are they running outta good spot to punch holes in the ground? These are the considerations that can justify a stock selling at what the pure value buyers consider a premium price. And almost every time I was able to dig such superior achieving companies out of the pack using my industry background in subsurface mapping and prospect generation,.I had a big winner. CRK, PQUE and EPEX each have those characteristics IMO. Once we get the current nervousness in the broad market behind us, am confident we can get some excellent price runs out of those and some other candidates I'm currently digging into. The coming deep freeze in January and beyond should make us some serious $$. Isopatch