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

To: Paul Senior who wrote (39097)	9/3/2010 8:13:05 PM
From: E_K_S	1 Recommendation Read Replies (1) \| Respond to of 78465

Good overview on your valuation views especially EV (Enterprise Value) vs Market Cap. Yes debt can be a big issue for the small emerging E&P companies and even the larger ones that use a lot of leverage. I really have only gone through the detail 10K's and 10Q's for two or three of these producers. I have a much better idea of what to look for now. Here are some of my observations (from a value guy). 1) I tend to look for hidden assets or assets that the company owns which everybody else thinks are worthless. For example, One of these NG gathers generated 10% of their revenues from a shipping subsidiary. I forget the name of the company but that had a pretty extensive logistics business that serviced the Caribbean Islands shipping storage containers. This business could be considered a hidden assets and perhaps quite valuable to the right acquirer (like FedX or some land freight company). 2) For the small E&P guys, access to capital (and lots of it) is key and at the right price too. They may have the best oil in-the-ground but could go bust w/o the right JV partner. A company that has their lines of different debt already set up (like GMXR) and bought at the right price, could be a bigger winner in the end IF (a) the capital spent was not wasted and (b) future Capx spending is more efficient (ie. utilize horizontal in-fill drilling technology). 3) With the bigger and more established E&P operators I have noticed that there are large amounts of complementary assets (usually w/ extra capacity) in use that may currently generate a higher operating $BOE but as extra capacity is used (or sold to 3rd parties) brings down overall operating expenses significantly in years 3 and out of a well's development. This includes NG gathering and oil distribution pipelines, storage substations and other infrastructure where capital has been spent to build out a developer's well field. Many times the detailed reports do not specify where there may be overlap w/ another well developer and/or the value of the potential revenue stream(s) that can be generated by selling (or leasing) this extra capacity. The $BOE operating cost calculations generally do not not take into account the "potential" excess capacity value of the revenue generated from these assets. In fact, for a marginal producer who has spent significant capital on their infrastructure build out, may find a larger partner that values their infrastructure assets more than their proved/potential oil/NG in-the-ground! Some of the super large integrators may pay more (or less) for a smaller E&P developer depending on the overlap of their complementary assets located near or next to their already developed parcels. ===================================================================== Therefore as I look at a lot of the minute details in these company reports, I am attracted to some of the intangible assets over looked by the general E&P analyst. I guess it is my flea market hunting experience. I can observe a lot of potential value in the same asset where another just sees it as junk (or even a liability). EKS FWIW - Sold 40% of my Honeywell International Inc. (HON) that I bought 9/2009 for a small gain (about 10% w/dividend). I will continue to hold my cheaper shares that have a higher Yield/Cost return.

To: Paul Senior who wrote (39097)	1/4/2011 7:06:39 PM
From: E_K_S	Read Replies (1) \| Respond to of 78465

Hi Paul E&P Land Leases - Not all are equivalent I have been studying several E&P annual reports and in particular looking at the specific types of land leases used. I come away more confused as the annual reports really do not provide the details of the specific lease terms necessary to compare which companies have the best leases. Did you come to this conclusion on your reviews? Many of the leases have both three year and five year terms. Several have different royalty payment amounts depending if on (1) Indian Reservation land, (2) BLM land and/or (3) private land. Some of the leases provide for sub-leases with an over riding royalty paid to the lessee. All of these factors can affect the final cost of production to the lease holder. I suspect that some of the older leases and/or original land owners have the best terms. Many times when they sell their land interests, they keep a small "over riding" royalty interest which when bought by a large E&P driller can generate perpetual "royalty" income to the seller. The hidden value lies with the large land and/or lease holder that have no expiration term or with the mineral rights acquired years ago. Usually the much larger company can negotiate (and even demand) the most favorable terms. That's how they can achieve such a low cost of production. In summary, all land acquisition deals are not the same. One must be careful with the smaller E&P companies as their land deals look to be the most constrictive and w/ their limited capital could be squeezed by lack of performance and lose their lease(s). Finally. what is to prevent the Federal and/or State or local agencies charging additional taxes/royalties on all producing NG/Oil wells and/or upping their permit fees for well development. This seems like a possible new source of revenue especially for States loaded w/ debt (ie California). Therefore, E&P companies w/ operations in the mid west, North Dakota, Wyoming, Colorado, Montana may be better prospects. EKS P.S. The more I study the landscape, MDU through their Fidelity Exploration Company may have the best overall package of leases (both w/ terms & locations). ( investing.businessweek.com )