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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: TobagoJack who wrote (32829)	5/1/2003 8:20:53 PM
From: energyplay	Read Replies (3) \| Respond to of 74559

Hi Jay - You might want to model San Juan Trust SJT first, as it is much simple - no currency issue, no new deals. Look at www.mcdep.com - I think Kurt Wulff has already done some modleing. You are right that the business is pretty straight forward. NCE (NCN in the US) is on more of an expansion path that some other trusts. "So, basically, a big portion of the earnings of existing reseves goes to pay for distributions, and then new money is raised to buy new reserves, the earnings of which is split pro-rata between new and existing unit holders." Yes, and the various trusts differ in how many deals thay do. Big generalization warning - Intersetingly, most of the holders of these trusts SEEM TO BE sensitive to the income of the next 3-4 months much more than the distribution ove the next 12-18 months, and rarely does the price seem to reflect a discounted caash flow of a reasonable future (like even 3-4 years, not 10-20) Very short term orientation in the price. Let's take a theoretical trust that was distributing $10 million a month income from a revenue of $14 millon. Revenue comes from 4 Bcf per month sold at $3.50 / Mcf Let's say they bought a new field that has probable+proven reserves of 1000 Bcf (1 Tcf) of gas for 20 million dollars, or $0.02 per Mcf (bargain of the century). This field, once in production, will deliver 4 Bcf per month for 20 years. This will double production and gross revenues. This field will require development costs of 2 million per month for 30 months, total of 60 million. This should drill 80 wells, each of which will average 1.7 mmcf/day, or about 0.051 Bcf per month. When this deal is announced, the stock price will drop, and stay down for 3-4 months or more ! Why ? because distirbutions will be lower short term by 20%, or 2 million. Note that after 1/5 of the wells are drilled and on line, the new cash flow will make up the 2 million, and distributions will be back up. (this would take about 6 months for the drilling, plus about 3-4 for completion and for the cash to show up)In another 6 months, distribution would be up another 2 million, and this would contime until distributions had doubled, about 34 months later. Even with that fairly quick and low risk return, the stock shoud be expected to drop more than 10%, maybe close to 20%. The above has an extremely low price for buying reserves. But now matter how good a deal, the stocks are sensitive to short term payouts. Prices for reserves range from $0.50 to $2.50 per Mcf, with most deals running about $1.50 or so. You then get to spend money + wait for gas to come oput of the ground each month. If you pay too much for reserves, there is dilution and much lower return possible. The easy way to pay too much for reserves is to think you are buying 100 Bf in the ground and find a year later it's only 40 Bcf. Now, IF natural gas is going through a secular change, and instead of being worth $2.00 -$3.00 it will be worth $5.00-$6.00, then some one who messed up and paid $3.50 / Mcf gets bailed out. More later. Talk to Kastel and a.handbag about models.

To: TobagoJack who wrote (32829)	5/1/2003 9:29:20 PM
From: Cogito Ergo Sum	Read Replies (1) \| Respond to of 74559

Hi Jay, Also depending upon what you are investing for ST or LT look at NCN hedging which is typically minimal (better obviously if NG is on the rise or steady). Enerplus as I recall seeing uses only about 60% of cash flow for distributions so is less likely to dilute (ie. your and then new money is raised to buy new reserves for acquisitions. I'd say Enerplus is more conservative. I own some NCN for the interim but for me it's one that goes out the door in a hurry if I see my take on NG (rather bullish with hiccups) changing, a swing trade as long as it's swinging my way :o) It was very profitable for me in the NG bubble played that way. Sure is a nice bonus play for you guys with the rising Loonie. See your MGS doing nicely today :o) regards Kastel