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Gold/Mining/Energy : Canadian Oil & Gas Companies -- Ignore unavailable to you. Want to Upgrade?

To: RIK who wrote (4484)	1/14/1998 5:34:00 PM
From: Kerm Yerman	Read Replies (2) \| Respond to of 24927

RIK / Debt Adjusted Cash Flow - An Excellent Topic I put out basically the same question a couple of months back and didn't receive a reply. I too, was looking for the fundamental equation equaling debt adjusted cash flow. Do I think we should be reviewing companies factoring this number into our thinking. Yes, I feel it to be priority criteria, especially at this time. This is why. In the past year and a half, companies have not hesitated to take on debt. They did this when equity was easily made available via many channels, especially investors like ourselves who jumped at the offerings. Producers were rolling on the good times. Well, times are a-changin. We all have heard about the basic negatives overhanging the industry at this point in time and, will probably continue to hear the same throughout the coming six months. Readily capital is drying up. The operating environment is more expensive. Companies are being forced in a position to operate within their means, that being cash flow. This brings me to my growing concern and, that is worries regarding debt. As we enter the second half of this year, the growing concern of debt burden will surface and then roar its ugly head mid-fourth quarter. The problem won't effect the larger producers, but more so with the Junior Oils, or companies with less than 5,000 barrels daily production. The smaller the company, the worst scenario. There will be companies with 1-1/2X or more, debt to cash flow ratio's which will be falling short of their cash flow forecasts. Shareholders will lose their shirts if they have invested into these companies. It's a been there, seen that situation for me - back in 1993/94. The companies that got themselves in this type position didn't survive - and if they did, were badly crippled. The survivors are now just coming out of the hole after taking drastic measures to eliminate this heavy burden. Archer Resources is an example, as well as Harbor Petroleum. I pay attention to the net debt to cash flow multiples. Back in September I saw a report reflecting average debt to cash flow multiples for the Senior Oils at 2.0X, Intermediate Oils at 1.4X and Juniors at 1.5X. These multiples were in place at the peak of cash flow and earnings. At this point in time, in my way of thinking, I would feel very uncomfortable investing into companies whose current debt to cash flow multiples are higher than these averages. I am hopeful that the companies I have an interest in, plan to reduce their multiple's. They can maintain the total amount of dollars of debt. Increasing cash flow over a period of a few quarters will reduce the multiple. The key is providing growth within means. I know I didn't answer your question, but you have my thoughts. I should of followed up with my inquiry, but dropped the ball. That happens when you are trying to do so many things at the same time. For others who are reading this message, if you are in touch with an analyst -- please ask for a precise answer as to how debt adjusted cash flow is calulated.

To: RIK who wrote (4484)	1/14/1998 8:28:00 PM
From: Kerm Yerman	Read Replies (4) \| Respond to of 24927

RIK / Discounted Debt There was one other area I forgot to mention in my last reply to you. You said "I believe many debt ladden companies have already been discounted and that companies that are so encumbered present ideal take-over candidates." It's not so much that debt is discounted, rather than factored. It can be usually be seen (between the lines interpetation) in their cash flow multiple. Have you ever seen two very similar companies in terms of growth and operations and yet, one sells at a multiple of 5X cash flow while the other sells at 6.3X cash flow. Upon a closer look, you will find that the the company selling at 5X cash flow has a considerable amount of debt compared to the other. As far as a debt ladden company being a candidate for a take over. It's not that other companies are targeting the debt ladden company for takeover ---- the debt ladden company itself would pursue other companies to buy them out.