Continuing to attract investor interest during tumultuous weeks, buy recommended small cap independent oil and gas producers Cimarex Energy (XEC) and Birchcliff Energy (BIREF.PK) trend upward in stock price compared to the 200-day average. Oil producers Whiting Petroleum (WLL) and Berry Petroleum (BRY) also have positive stock price momentum by the same measure. Added to our coverage this year, Range Resources (RRC), PetroHawk (HK) and Ultra Petroleum (UPL) trend downward in stock price compared to the 200-day average thereby improving their attractiveness by the McDep Ratio.
All seven stocks have exciting upside in a scenario of global growth fueled by clean, secure energy. Today’s announcement that contrarian buy-recommended Royal Dutch Shell (RDS.A) agreed to pay $4.7 billion for a private shale gas producer validates that appeal. As Canadian small cap BIREF achieved the first phase of its rapid expansion in 2010, we added it to our buy recommendations on May 13. RRC could justify its current McDep Ratio premium before long as it develops its large, valuable acreage position in the shale gas boom in Pennsylvania, ignited when RRC drilled the industry’s first big Marcellus well in 2004. HK’s explosive growth is already evident in its steeply rising production from the Haynesville shale gas trend in Louisiana. Each of the stocks has the prospect to double or more in the next few years while also being more sensitive to political, economic, financial and industrial risk.
Low Cash Flow Multiple for Cimarex
Breaking down Net Present Value by separate reserve life and cash flow multiple for natural gas and for oil, we see for Cimarex that our standard estimate of $75 a share is lower than the approximation for peer stocks. The example illustrates how small cap companies can create rapid changes in value with changes in production volume and reserves. Higher reserves tend to increase life index and higher production tends to increase cash flow.
Roll Forward NTM to June 30, 2011
Choosing the next twelve months as the most relevant period for estimating an annual rate of cash flow, or income, we need to adjust the date periodically as we did this week. Adding in the second quarter of 2011 and taking out the second quarter of 2010 happens to reduce cash flow modestly on the basis of futures prices for oil and gas as of Monday, May 24. Futures prices settled higher on Thursday, May 27, but we usually make our weekly calculations on Monday settlements.
Originally published on May 28, 2010.