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

To: Spekulatius who wrote (38972)	8/26/2010 4:33:33 AM
From: Paul Senior	Read Replies (1) \| Respond to of 78470

Your valuation seems to me to combine production and reserves. I like to value the companies both, but separately On their flowing production, and I like to value the companies on their reserves. For reserves I'll take proved and probable barrels. Alternative 2pnpv10 if the company provides it. =========================== If your 100mm boe company lifted 10mm boe and didn't report that reserves were replaced by 10mm boe, that would seem to result in a negative roe number. And if they lifted say 12 mm boe the following year from a 90mm reserve base remaining and still didn't announce new reserves, that would be a further negative both in that roe is negative and the company seems to be depleting itself as well. I view it a a positive though in that the company is increasing its production (flowing production from 10mm to 12). And I just will assume that the revenue generated is either being reinvested in the business or distributed to shareholders. Perhaps your method would make adjustments for free cash flow, but I don't know how to do that satisfactorily. Perhaps what you are suggesting is maybe a good way to evaluate one e&p company against another. We have different interests here. For me, I'm looking for a quick easy method, that while perhaps inaccurate, is good enough. Good enough to cause me to believe the particular company is undervalued. Not necessarily to determine if it's a better value or that it has better management efficiency than any other e&p company. This view can work for me, perhaps not for anyone else though, because I'm willing to hold a couple dozen e&p companies in my portfolio. So I'm not so concerned in limiting myself by picking only what appears to be the best of the best.

To: Spekulatius who wrote (38972)	8/14/2011 3:43:07 PM
From: Spekulatius	Read Replies (2) \| Respond to of 78470

re UPL and E&P valuation. I looked at UPL again since the stock price has been weak after the last earnings call. This was one of the E&P companies (besides EOG and BGG) that I believed to have means (management, assets) to grow the reserves organically in the mid teens/year. Based on my framework post, the organic growth in reserves/share would be the metric to look for. Ok, right now they are growing but not organically any more. They will do about 800M$ in cash flow but invest 1.35B$ (upped from 1.1B$). They have about 1.75B$ in debt and that will increase, since they invest more than they take in. I believe it smells like they will do a secondary or sell some assets. Either way, it looks like they are not going to be able to grow reserves in the mid teens whithout adding debt. I believe a secondary may be forthcoming because they mention restrictive loan convenants in their 10Q. The ceiling that they hit, imo will be that the NPV of the reserves cannot be below 1.75x the debt. With 1.75B$ in net debt, that is about 3.06B$. The NPV of their reserves per 10k (31 Dec 2010) was 3.5B$ post tax and 5B$ pre tax. if the post tax number counts, they only have a 15% buffer (assuming everything stays the same) until they hit the loan convenants. That is very little buffer and I believe this is why I think UPL either needs to sell assets or raise equity. On the positive side UPL still performs well operational, their costs are under control. They also started a new play in Colorado (Niobara proximity) where they have accumulated 100K acres, probably fairly cheap. Still the post tax NPV of their properties is 3.5B$ which is way less than their 7.5B$ EV. Even if you consider that the method to determine NPV undervalues their long life assets that does not seem like a bargain. On my own metric, they own 4.4B MCFE in proved reserves (half of those are underdeveloped), you only pay 1.7$/MCFE. My guess is that nobody can generate proved reserves fopr 1.7$/MCFE. Based on that UPL seems fairly undervalued. The real problem is that NG is dirt cheap and selling it for 4-5$/MCFE is not going to do it for the producers, the ROI is not there. Maybe UPL Niobara project is going to alleviate that - both CHK and EOG started to go after more oily stuff a year or so ago and UPL obviously tries the same playbook. I like UPL management but I believe they are somewhat at the crossroads. Buy or wait is the question - what does the rest of the thread think?