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

To: 7 Years who wrote (41178)	1/25/2011 5:38:52 PM
From: E_K_S	Read Replies (1) \| Respond to of 78666

Hi 7Years - I too have been trying to compare these junior oil companies "apples-to-apples" with some way to rank them especially with the recent move in all of these E&P companies. I came across a term called "Netback" which may be useful in evaluating well development. investopedia.com "... A summary of all the costs associated with bringing one unit of oil to the marketplace, and all of the revenues from the sale of all the products generated from that same unit. The netback is calculated by taking all of the revenues from the oil, less all costs associated with getting the oil to a market. These costs can include, but are not limited to, importing, transportation, production and refining costs, and royalty fees....". Many of these smaller companies are spending a lot of money drilling new wells to increase their proven reserves. The value opportunity IMO is at the end of the day is: (1) What are their proven reserves and (2) What did it cost for them to bring the oil/NG into production. Their Netback amount (by well, by region and/or by drilling period) is a good measure of how well they are at bring a well into production. I also like the companies that are large enough (and w/ experience in completed wells) that drilling is almost a cookie cutter approach. They usually have entered into a long term contract w/ a drilling Rig owner and have enough wells planned to keep the rig & employees busy over the entire contract term. It takes a good drilling team about 29 days to complete a well. I have been focusing on companies that have 24-40 wells planned for the year. This way they can contract for at least one or perhaps two separate drill rigs w/ crew. A well should take anywhere from $1.5-$2.0 million to complete. Companies that have over 800 active wells begin to reach the economies of scale and efficiency for gathering services and/or production & distribution, storage and hedging. A lot depends on where their wells are located, how concentrated they are in specific region(s) and what side deals they have w/ JV partners. The larger operators have a lot of this already figured out and the really smart ones have planned their developmental wells way ahead identifying fields ready for a MLP gathering contract and JV partners with tons of cash to help finance the new wells scheduled for development. You might also want to check out RAM Energy Resources, Inc. (RAME)( finance.yahoo.com ) as they have grown their proven reserves through acquisition and now have several 1000 producing wells. They were a bit extended but recently sold some non-core NG assets to reduce debt. The stock seems like a good value when comparing risk/reward. I guess that if everything was clear cut and easy to evaluate everybody would be investing in this sector. The key is to try to find the diamond in the rough that has a lot of good assets and the money to develop the resources. My preference is to spread my money around w/ several companies. I do prefer some of the larger more established companies but you usually have to pay a premium. Its interesting to see what other investors feel is "value" and the criteria they use to quantify that. EKS

To: 7 Years who wrote (41178)	1/25/2011 11:59:59 PM
From: Paul Senior	Read Replies (1) \| Respond to of 78666

7 years. It's not going to be in the financials imo, and so I guess your daughter's explanations aren't going to be of much help. Jmo, I could be very wrong. How does one evaluate an oil company? I guess -- it depends. Large mega-caps: on p/e Mid level stuff: price to something. Price to cash flow. Maybe EV to Ebita? Small stuff: There's no earnings, so how to value? Price to nav? What is nav? (I like 2pnav10). Price to flowing barrel? I like that too. What price to put on a flowing barrel? Consider EKS's net-back as a start. (I have my general number.) Or another way, how about just betting on the management if you find some leader/team with history (prior company) of delivering results to stockholders (e.g. now with MHR, TAT) Just use McDep ratios (market cap and debt to present value of energy business)? mcdep.com What would be the steps? As you suggest, how about starting with the company itself and trying to value it itself on its financials. I'm still learning here. Then maybe the area it's in. I'm still learning here too. What ARE the best areas (shale plays) going forward? Sometimes -- as is my usual proclivity -- I'll like a subsector (here being a particular oil shale, ie. ND Bakken or Alberta Bakken or Eagle Ford, etc., and I'll just take on a basket of stocks in it. Sometimes then, the area overrides the valuation I'm able to put on an individual stock in that area. That is, for me, I just buy the stock as part of a package of stocks in the subsector. On the assumption the good guys in the basket will outshine the dogs there if I've picked the right subsector at the right time/price. So yes, I'm holding SPE.to, TOL.to, RAME, AEI.to. and many, many, many more. Of these four though, I'm buying significantly more AEI because the way I look at it, if AEI does actually meet its '11 oil production target (3300 boe/d exit rate '11; 85% oil), it is undervalued on a flowing production basis. TOL? Well, it's big relative to its size in the Alberta Cardium, but that's imo a story for 2013, so there's more time for that one, and maybe right now it's not such a compelling buy. (For me though, if I can be patient, okay to enter now.)

To: 7 Years who wrote (41178)	1/26/2011 12:19:46 AM
From: Paul Senior	Respond to of 78666

7 years: OT: Perhaps if it's the prospectors that one is concerned about (i.e the specific e&p companies), then maybe instead of these, it should be the sellers to these guys that ought to be considered. For me, given that I'm buying lots of stocks in several shale plays, it follows (to my mind anyway, maybe not to the value proposition though) that I'd be interested in the companies that are actually doing the fracing for these shale e&p's. I have a few shares of GasFrac Energy Services, Inc. (GFS.V/GSFVF.PK). Added recently also Canyon Services Group Inc. (FRC.TO/CYSVF.PK), and may add a little more. Again, jmo, I could be wrong (as I have been many, many times before), and I'm not suggesting these are value stocks at their current prices.