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Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: Dennis Roth who wrote (113642)	11/17/2008 5:24:27 PM
From: Ed Ajootian	2 Recommendations Respond to of 206154

Dennis, thanks most kindly, that is most helpful. The more I read from these CS guys the more I appreciate the quality of their work. This piece is required reading for anyone attempting to invest in E&P stocks today, IMO. Included therein is a great primer on pg. 2 of how reserve-based lending facilities work, borrowing-base redeterminations, etc. Unfortunately in this market you have to learn this stuff if you don't want to get your head handed to you. They say that banks have been using $65/bbl. and $6.50/mcf in their price decks but they think banks are already using sensitivity cases in the $50/$5 range. This could cause a lot of E&P's some problems if it comes to pass (i.e. the banks lower price decks to these figures). An indication that current commodity pricing is incongruent with current F&D costs is Credit Suisse's determination that the median 3-year average F&D costs for the companies in there universe is $2.65/mcf (Exhibit 14). A rough rule of thumb is that your F&D costs need to be no more than a third the current selling price of the commodity in order to make a reasonable return. F&D costs are certain to come down this year, (due to lower rig dayrates, etc.) but I'm not so sure they will fall below the 3-year average. For those of you scoring at home, with $2.65/mcf finding costs you need ~$8 gas to make money.