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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (37425)	4/17/2010 2:00:53 PM
From: E_K_S	Respond to of 78763

Hi Paul - RE: E&P company valuation The only other factor which might differentiate one company from another is the company's cost of producing one barrel of oil (or equivalent unit of NG). This would include their average cost per acre under production to extract and process the oil for distribution. There might be some really cost efficient producers (those using vertical drilling technology, modern gathering systems and the newest capital equipment) that are getting screened out from your simple value analysis. Different producers have significantly different costs for extracting their resource and making it deliverable to the market. In the long run the low cost efficient producer should demand the highest value. My Dad did a similar analysis 25 years ago with many of the small to medium size gold mining companies. I still own several which were eventually bought by BHP (received BHP stock). He arrived at an average cost to produce 1oz of gold from each of the specific mines he reviewed. The production costs (by mine) were available in the annual reports which allowed him to identify the low cost producers. He charted the average extraction cost to market the price and established a Buy point when the market price was x times the company's average extraction cost. He accumulated shares over time when his buy point was triggered. It turned out to be a quite profitable value buying system The biggest problem in using stated reserve numbers is that these figures or only as good as the independent engineer's review UNTIL they are adjusted! This occurred for Royal Dutch Petroleum several years ago where out of the blue they readjusted the value of their "proven" reserves down by $1 Billion. I like the concept of identifying the low cost producer. Different parcels have significantly different costs involved in producing 1 barrel of oil. By ranking the cost to produce 1 barrel of oil by parcel(s) location by company might allow you to create a top ten list of the low cost producers. I might pay a bit more for a company that is a low cost producer (or owns parcels where it is cheaper to extract the oil) than for one that is a higher cost producer but may have larger proven reserves. EKS

To: Paul Senior who wrote (37425)	4/17/2010 4:32:39 PM
From: Spekulatius	Respond to of 78763

Paul, the $/BOE number is available with the annual report and for most companies it is filed on 12/31/2010 so the underlying price assumption would be the same. This does not replace NAV valuation but is an easy way to compare similar companies and a way to tell if NAV values are out of whack. I also like to look at finding cost. Some companies publish these numbers but again it is unclear how these values compare. So one can look at the DDE in $/BOE to get a feel what the historical finding cost really was. The DDE cost is nothing else than the depreciation of the capitalized value of the producing properties. Of course the historical cost may be different than what the present finding cost. However I found that some companies like XOM and EOG tend to beat their competitors in that metric. This means nothing else than they are very efficient in finding oil or gas.