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Strategies & Market Trends : Three Amigos Stock Thread -- Ignore unavailable to you. Want to Upgrade?

To: j g cordes who wrote (15384)	5/4/1999 7:29:00 PM
From: Sergio H	Read Replies (3) \| Respond to of 29382

Jim and DD: Do you guys agree that there is a potential natural gas shortage? I'm looking at Hugoton Royalty Trust (HGT). The Trust is entitled to receive 80% of the net profit interests from 3 properties with 12.9 year reserve life. An investor in HGT receives a dividend each month based on the price of natural gas. Here's a good article from stockgroup.com on evaluating oil and gas stocks: Time to Take a Closer Look: Some factors in oil and gas share analysis You can read this story at stockgroup.com By David A. McLellan On Friday April 30, the price of a barrel of West Texas Intermediate crude oil hit a 16-month high for the third straight day. There has been no shortage of media coverage detailing the 52% price increase since March 1/99 of a barrel of WTI. Additionally there has been mention of the possible shortage of natural gas and the effects that has had on the price of that commodity. Both factors have lead to a resurgence of energy shares from their winter doldrums. The market now provides investors with an opportunity to acquire shares in selected energy companies that have been oversold and/or undervalued. For those unfamiliar with the energy sector that can be a challenge. Like other industries, if an investor were willing to perform thorough research and make prudent decisions, the rewards can be significant. What should an investor consider when looking at a junior exploration company? First Oil and Gas companies use one of two methods for accounting, Full Cost Accounting or Successful Efforts Accounting. Under the full cost method all costs for exploring and developing petroleum reserves are capitalized and then charged against earnings as oil and gas are produced. Under the Successful Efforts method, only those costs related to successful drilling are capitalized and those related to unsuccessful drilling are charged against earnings in the year incurred. An investor should be aware which method is being employed so that he/she can then make more accurate comparisons between different companies. The accounting method should be stated in the annual report. Secondly there must be a value assigned to Oil and Gas reserves. An independent engineering appraisal of the discounted cash flow (annual cash flow generated stated in current dollar values) should be included in the prospectus of any public offering. Some of the variables in the engineering appraisal include: 1) Categories of Reserves - including proven reserves, probable reserves and potential reserves (yet undiscovered). 2) Production capability of reserves 3) Oil and Gas prices 4) Capital and operating costs 5) Royalties from production 6) Selected discount rate 7) Treatment of taxes Once the value for the reserves has been assigned, there must be a value assigned to exploration rights. Finally there is the valuation of all other assets and liabilities. After the foregoing items have been calculated, it is possible to calculate a net appraised asset value per common share (before income tax). That figure is calculated as follows: [Discounted value of estimated future cash flow from all net oil and gas reserves over the expected productive life of those reserves plus Value of non-income producing assets plus Value of all other assets Minus (outstanding liabilities plus preferred shares outstanding at redemption value)] divided by Number of common shares outstanding This appraised asset value is the theoretical price at which the company's shareholders should sell their shares to a buyer. The above information is only the beginning. There are many other factors to consider such as management quality, property and reserve locations and more. There are many professionals available to help a potential investor with research and there are many different sources on the Net where research can be conducted. Some useful hyperlinks to these resources include the following: pcf.ab.ca petroleumstocks.com nationalpost.com 504%2F2555385%26s2%3Dinvesting