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Strategies & Market Trends : Bosco & Crossy's stock picks,talk area -- Ignore unavailable to you. Want to Upgrade?

To: Crossy who wrote (3145)	3/8/2002 11:07:34 AM
From: Crossy	Read Replies (1) \| Respond to of 37387

HOW TO VALUE OIL EXPLORATION FIRMS - a nontraditional approach There has been a recent book on the topic of future oil shortages called "Hubbard's Peak". In it a respectable geologist predicts a peak in oil exploration (quantitative) in the year 2003.. Now how to capitalize on that ? I would think that oil EXPLORATION firms should do best. The downstream firms (refirneries & marketers ) should do well too but are not sitting on a bottleneck in their asset rosters unlike the upstream players.. Inside the exploration oriented firms there are 2 groups: integrated oil and independent oil. The big problem now is HOW TO VALUE those beasts ? My argument here is that traditional valuation matters won't suffice here, particularly not in the upstream oriented firms that do the actual extraction and drilling and own the site properties / rights. Price Earnings ? Forget them. A lagging indicator. Moreover Earnings is a residual figure. Price/Sales ? For a mining/exploration firm even revenue is a managable figure. I would suggest to look at the "PROVEN RESERVE" figure and relate it to marketcap. In this way you arrive at an indicator that relates to the relative valuation the marekt put on a firm's reserve. To normalize OIL/GAS (almost all firms do yield both) you have to convert the Million Barrels of Oils (MBOE) to Billion cubic feet first arriving at BCFE's .. Billion cubic feet equivalents. The standard formulae is ... BCFE (Total) = BCF (Gas) + 6 * MBLO (Oil) The ratio BCFE/MARKETCAP is the figure one could explore for undervalued exploration firms. Acc. to SEC/GAAP the proven reserve figure relates to the reserve which are FEASIBLE TO BE EXPLOITED ECONOMICALLY. The Proven Resrve usually can be found in the most recent 10-K filing Usually for most bellwethers the ratio BCFE/MCAP is way below 1. The higher the ratio the better the "value" in front of you and the cheaper the oil stock is relative to its exploitable reserves. For investments in oil exploration one should also look at the composition of the drilled products : oil/gas composition and of course debt levels.. Now revenues and earnings are nice but i found it quite a fruitful approach to play "contrarian": looking for companies with too high Price/Earnings or no earnings at all, many a times with quite leveraged balance sheets but a very high BCFE/MCAP ratio which should tell about the future revenue generating potential. Once this potential is unlocked, upgrades tucker in and suddenly Revenues and Earnings are beginning to reflect the real potential of the situation in front of us. Firms with very high BCFE(Proven Reserve/MCAP Ratio are.. SNP (Sinopec) .. China Integrated .. BCFE/MCAP .. 1,65 P (Philips Pete) .. US Integrated .. BCFE/MCAP .. 1,79 HHLF (Hurricane) .. KAsakhstan Intg . BCFE/MCAP .. 3,50 BNO .. Russia/Venezuale.. High Ratio.. TNT (Russian ADR).. Russia ...........BCFE/MCAP .. 36 VPI (Vintge Pete).. Indep. US oil ... Raio > 3 WZR (Wizer Oil) ... Indep. US oil ... Ratio > 4.5 best rgrds CROSSY