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  • Dorman Products: 70% Downside As Cyclical Headwinds Pick Up & Aggressive Accounting Unwinds [View article]
    I have no position long or short and have no intention of taking a position long or short.

    A couple of observations from someone that wrote short selling research for 10 years.

    1. Your insinuation that they are subject to potential patent litigation seems way off the mark. In their risk section in the 10K they say a risk is increased patent FILING, not litigation, which seems to mean that they are designing or acquiring products that are not patented. There is also no additional disclosure of ongoing litigation other than boiler plate language to indicate they are being sued much anyway. They give numerous examples in their 10K of products they designed and why and how they are used. Considering their main customers are AZO, AAP, NAPA and ORLY would also indicate they are not distributing "gray market products." I do not think that should be your lead argument, unless you have stronger evidence that they are really at risk because they are selling things investors do not realize they are selling. If you do, I would make it an even bigger deal.

    2. O'Glove and Tice would be pleased with your focus on the working capital changes, but your categorization that it is masking a deterioration in their business might be a bit strong at this point. Revenue growth is still almost 20% a quarter. While some of that may be driven by extending payment terms, not sure is it driving the 20% gain last quarter. I guess I could calculate what it would be if DSOs were flat with two years ago to get a sense for what sales growth might be. I do think their customer concentration is a risk and that they can continue to be squeezed. Cash from operations as a % of sales was 7% in 2009 and was 10% in 2013. So even with the increase in DSOs, CFO has increased as a percentage of sales. If things were about to go sideways, I would expect that percentage to be declining because the increase in inventory and receivables would be negatively impacting CFO. So more analysis of this would be interesting.

    3. The customer credit % seems to be what it is. Couldn't find the breakout in the 10K (good job reading it better than I did), but I did see that their estimates and actual experience of returns and credits were in line. So until they start to diverge, not sure it is a given that it will happen in the next 18 months as you think it might.

    4. Glad to see some focus on something other than just the macro. The best shorts are company specific problems that don't need the macro to appear. Macro helping is always a bonus. The best shorts are slow growth companies masking as high growth companies and using financing and other things to prolong the growth. This company seems to be exhibiting some of those characteristics.

    5. The company seems to be successful in arbitraging the scarcity of replacement parts from OEMs (keeping them at dealerships only to drive customers to the dealerships even after warranty expires) by designing or sourcing high quality replacement parts. Not reselling OEM parts or acquiring gray market parts from rogue manufacturers. This has helped them boost margins as their products are clearly in demand and provide an alternative to OEM parts. They have also increased their SKUs substantially so that is driving incremental new sales. They even say in the 10K that is the key to their business. The key is how that trend slows/reverses. Less older cars on an absolute basis would certainly help that because as long as a car is under warranty there is no incentive for car owners to get car repaired anywhere else. A narrowing in the types of things they can sell is another. I see they are expanding into trucks and other vehicles. That might prolong the sales growth. Reading the 10K, it seems some of their value to say AZO is that they have designed or acquired parts that can be used in many different manufacturers cars. So instead of having to have 10 of 10 different widgets in stock because they service 10 different manufacturers, they can carry say 20 of just 1 or 2 widgets that can be used on multiple cars. They mention a Xenon headlight that can now go on 6 models vs. just one.

    There has been a mix shift to more Power-train and Automotive Body parts (66% vs. 61% two years ago) and perhaps those items are higher priced and higher margin items? Hardware has dropped 300bps as a percentage of sales and I would think 1 power-train item sells for a lot more than a hardware item (although volume is a factor).

    6. There is a longstanding joke that you short a company when it starts a SAP or ERP upgrade and buy it when it is done. The number of companies that stumble with upgrades is certainly very large.

    7. I commend you for making a bold estimate of sales in 2015 of $700M vs. the Street at $820M-$850M. If you are close to correct, the stock will certainly be much lower.

    8. There is also no doubt that since 2009 when the company earned $0.74 per share and had a net margin of 7% and a PE of about 10X growth and operational improvement has been impressive. Revenue has doubled, earnings have tripled to $2.65 in 2014, the net margin has doubled to nearly 14% and the PE has gone from 10 to 23. Companies that go from stable slow growth companies to superstars always should attract scrutiny. I am not sure the accounting issues and the macro can account for all of that improvement, but this article is a reasonable starting point for further investigation of the transformation of the company. The revenue growth rate seems unsustainable in the long run, which means the 17-20X EPS multiple is also most likely unsustainable. it is unclear what drives the margins back down, but it is most likely going to be that revenue growth and/or gross margin is slower/lower than the growth in SG&A and R&D. Classic case of management building the infrastructure to maintain a sales growth rate that is not sustainable. And then when they miss and get hammered, the "cost cutting" announcements take place. As is usually the case with short ideas, timing is the hardest thing to guess right on.

    9. Has any of your points about consolidation been brought up on conference calls? it would seem like something that would be an obvious concern. If not then I guess it all comes down to "it doesn't matter until it matters."

    10. I see most of the shareholder base is growthy and momentum investors. That is always good to see as a short seller. Contrary to popular belief, stocks don't go down because short sellers are selling more and that is driving down the price due to increased supply, it is the long incremental buyer that has turned into a seller and the lack of new buyers that sends a stock down. Outside of T Rowe Price, most of the other holders are index funds (dumb buyers) are small cap growth funds. The absence of Royce (only owns 300K shares), Heartland, Keeley, Gabelli, Baron, Ariel and other "value guys that also buy some growthy small cap stuff" shows that the incremental price setter here is not that sensitive to valuation or the long term business model potential.

    Thanks for the article.
    May 30 06:14 PM | 11 Likes Like |Link to Comment
  • Sirius XM: It Seems The Buyback Has Started [View article]
    I have followed the stock since it went public. I have been an analyst that focuses on leisure and entertainment stocks for 30 years. I am aware of its history and merger with XM. There was a lot of debate at the time about it going through due to anti-trust issues. Seems the radio companies were right about the combo company being a very tough competitor.

    I have followed Liberty Media for as long as I can remember and their interest in SIRI has been strong along. The analyst day presentation last year should be read by everyone. BKS SIRI and LYV all presented. I have no investment interest in SIRI at this point and haven't done any specific research on it.

    Ignore the daily stock price change and news flow. Know what you own and why you own it. You own SIRI because you think it is going up 3-4X. You have your own estimates as to what will drive revenue higher (more subscribers and/or higher monthly fees adjusted for churn), boost EBITDA (higher gross margins on lower content costs and lower equipment fees and higher operating margins on leverage of SG&A). I am sure you have also looked at how all that translates into how free cash flow impacts net debt and how stock option issuance and share buy backs will impact total shares outstanding so you can calculate an EV/EBITDA ratio in order to derive your 3-4X return. I am sure you have your reasons for thinking that SIRI should trade at a certain EV/EBITDA valuation. And you know how much of that 3-4X return will come from higher multiple of EBITDA vs. higher EBITDA. Every stock price change is a function of that algorithm. Remember, if the stock is $4 in a year, then either the multiple increased by 33%, the earnings increased by 33% or a combination in the change in those factors occurred. Sentiment changes for lots of reasons, some predictable, some not. EBITDA growth is what it is..

    You can keep it simple and you will be fine.

    Successful investors have confidence in their process and analysis and the good ones do not substitute stock price movements explained ex-post by the "media" or bloggers to influence their decisions or change their analysis. An analyst's job is to try and see the "why" a stock did what it did ex-anti, not ex-post. I am amused by how much time is devoted in the media and on financial websites is spent trying to explain "why" a stock or the market did something on any given day. Everyone can sound like a genius in hindsight.

    If you think SIRI is going to go up 3X-4X, take it off your screen and look at it in three or four years. Watching it every day and reading news and posts like this is a waste of time if that is your time frame. Read the SEC filings when they come out, read the conference call transcripts (takes less time that sitting on a call for an hour listening to analysts babble on about worthless things like how the next quarter looks). Look at management presentations, but with a bit of skepticism. These things will help you become a better investor.

    If you think the media and short sellers are keeping the stock price down, you should be happy about that. Read Warren Buffett's comments on how an investor should welcome a lower stock price if you are buying stock or the company is.

    Remember, there are lots of studies that show that stock prices are up to 16X more volatile than the underlying fundamentals of a company. And smart investors take advantage of that fact..

    Too many investors think "new news" is the most important data point in their analysis. Most of the time it is irrelevant. Invest in a company, think like you own the whole thing and not a story.

    Good luck

    Mar 27 03:50 PM | 10 Likes Like |Link to Comment
  • Energy Recovery Inc.: The Little Company With The Big Technology [View article]
    Chris,

    I think you need to rethink a lot of your model assumptions..

    For example, your "downside" scenario seems too aggressive in terms of what the company can earn.

    I am just looking at the Op Ex line and not the revenue or gross margin line..

    You think their run rate on SG&A under your base scenario is $22M.. Their SG&A hasn't been that low since at least 2009.

    2009 $23M
    2010 $26M
    2011 $28M
    2012 $27M
    2013 $26ME

    So you seem to be starting with an SG&A assumption that is too low at $22M

    In your downside scenario, you are using $11M in OP Ex.. Do you really think they are going to cut Op Ex by 50% if sales disappoint? If they truly believe that the future is as bright as you say, don't you think they would continue investing in R&D (you have it being cut in half) and marketing and infrastructure?

    In 2011, sales dropped 36% ($17M) and Op Ex ROSE $2M. In addition, it appears as though you have ERII making $0.11 per share on $30M in sales, when the Street thinks ERII will make $0.02 on $51M in sales.

    It seems highly unlikely the company would make MORE money on 25% FEWER sales.

    Also, your "conservative" 2015 revenue estimate is 2.3X 2013.. Quite a growth rate for a company that has shown a 20% decline in sales since 2008. I am not sure I would call that assumption "conservative". Your analysis may prove correct, but at least on the surface, your models seems to make some very simplistic assumptions that don't really reflect recent past in terms of expenses or execution of their sales plan.

    Revenue and gross margin assumptions are hard to make with this company, but your estimates could be as good as anyone. No one (including me or management) really has any idea. But Op Ex has a pretty good history to look at and there have not been many dramatic changes in them over the last five years. So I think it is much easier (still not easy) to estimate (really still a guess) Op Ex and your assumptions seem a bit out of whack with history and how a company like ERII would probably manage them.

    For example, what would you think about the company's future if they cut R&D expenses by 50% this year? It has grown almost every year. Would you think the company's apparently bright prospects has suddenly changed dramatically?

    Same with sales and marketing. If the company wants to double its revenue because it has a great product for a new market (O&G), what would cutting sales and marketing by 50% seem to mean in your downside scenario?

    Management truly believes in their products and their potential, so I do not think that they would suddenly cut expenses by 50% if things got "pushed out" a few quarters.

    You seem to be making a classic mistake that many young analysts are make. Your modeling expenses as a percentage of revenue and not what they might be based on how the business is actually run. Your expenses as a percentage of revenue are exactly the same in your base scenario and your downside scenario.

    Hope this helps.

    I used to work at Manalapan with your boss Joe. So I have followed ERII a long time.
    Jan 29 09:55 PM | 7 Likes Like |Link to Comment
  • The Illusion Of Control [View article]
    Thank you all for your comments and compliments. We want to do a series of articles about subjects like this. We are glad that everyone found it thought provoking and inspiring. BTW we love the irony sentence too!!!!
    May 3 10:14 AM | 5 Likes Like |Link to Comment
  • The Illusion Of Control [View article]
    thank you for your comments. I haven't watched CNBC or any other business TV show in over 15 years and don't even have a TV in my office.
    May 2 11:58 AM | 5 Likes Like |Link to Comment
  • Texas Pacific Land - The Ultimate Buy And Hold Stock [View article]
    I agree that at these prices it is not as attractive as before. I did try to make the point that most investors miss. The idea that as stocks go up they actually become less attractive to serious investors and as they go down they almost always become more attractive. I like the fact that they will by fewer shares the higher the price goes. Eventually the arbitrage between creating and destroying value for the long term shareholder by buying back shares goes away the higher the stock price goes. Are we there yet? Maybe. But unlike most companies, at least it will be doing less damage automatically and not do what most companies did in 2008-2009, which was buy a lot of stock at the highs and relatively less at the bottom.

    Also tried to help investors with a scenario that on its face would be taken as a "negative" to the typical retail investor (no land sales, declining income from lower oil prices or lower # of wells or production per well or all three and no easement income) to help them "get ahead of the news" so to speak and formulate a plan of action if the stock price reacted to such news or other extemporaneous events. We try and avoid thinking about the macro, even though it does have a direct impact on this type of company. So we try and look at it as if the macro is lousy and see what happens to the thesis.

    Our articles are as much about helping investors learn about how to analyze a company and develop a process as it is just for timely idea generation. Which is why it was great that SA selected it as an A-R idea even though it isn't the typical "buy or short it today" idea.

    What other stocks have similar properties to TPL? We would love to look at them.
    May 31 01:35 PM | 4 Likes Like |Link to Comment
  • Dorman Products: 70% Downside As Cyclical Headwinds Pick Up & Aggressive Accounting Unwinds [View article]
    Another interesting way to look at DORM sales. There are really two components of sales and sales growth. 1) the underlying base business growth 2) the new products growth

    The company gives enough information in 2013 10K to get a sense for the split.

    In 10K the company says that 20% of 2013 sales are from products introduced in last two years. So multiplying 2013 sales by 20% gives you the incremental sales since 2011 accounted for by new products.

    2013 sales $664M
    X 20%
    = $132M

    Sales in 2011 where $513M

    So you can calculate base sales growth from 2011 to 2013 of about 5% total ($664M-$132M= $532M) $532M/$513M= 4.8%

    2.5% CAGR would seem to be below both the industry growth and its main customers' sale growth rate (would think store growth alone would be that high).

    So in order to maintain the recent sales growth rate, the company has to keep introducing new products at a rapid rate.
    Jun 3 12:44 PM | 3 Likes Like |Link to Comment
  • The Illusion Of Control [View article]
    I have thought about this for a while. Since most value benchmarks are skewed towards financials 20-25% of weighting, I have not been a big fan of most funds in that space. While others claim to be successful at analyzing large complex balance sheets of banks and other financial institutions, Gregg and I have always passed on that. I think someone that runs a concentrated large cap value fund has a better chance than a broad based fund. The upside of large cap value is that usually the bad news is much more widely distributed by the media (BP or HPQ or AAPL) that may drive the valuations to such prices that attractive returns are very likely. Very few problems at large companies are life threatening and they have the financial ability to withstand what it takes to turn it around. I low PE or a high FCF yield is probably a good enough starting point. The analysis may be as simple as "things will eventually get better in the future".. Usually after major bear market selloffs is when large cap value becomes a viable strategy because everything in every index is going down, but companies are all different.
    May 2 12:13 PM | 3 Likes Like |Link to Comment
  • Body Central Cheap For A Reason: Isn't That Always The Case? [View article]
    I agree about the long term. I tried to get the PM at my old firm to "load the boat" on AEO at $8-$10 when it was yielding 4-5% and had 25% of market cap in cash.. He told me they were in danger of cutting the dividend (nonsense) and talked about all the obivous things going on. So I bought it myself.. Time arbitage is still a great tool for investors. I have seen it for the last 15 years working with and for hedge funds..

    I own too many stocks. LOL. But at the right price most companies can be bought as a decent investment.

    The thesis on ARO is simple as are all my investment themes.. Out side of BODY, it has one of the lowest EV/sales ratios of any company that is not a grocer or office supply store. If margins just recover 40% of peak or so it will be more profitable and the valuation and multiple will expand.

    Most of the time I don't really make much of the fashion risk or current trends. I assume that most of the time eventually someone wil l get it right on a company that has been around along time and was very popular before. ANF AEO GPS LTD BKE COH FOSL URBN WSM ROST SKX M KSS etc.. the list goes on and on with retailers going in and out of favor. I have been doing this 30 years and nothing really changes.. Soon we will get the big seasonal sell off in retailers and for the 1 milionth time "the consumer is weakening". Happens almost every year going into the summer. Then investors start worrying about back to school and then Christmas. Then there is hope that things "aren't as bad as feared" and then the rally and then the selected sell offs on the ones that are "worse than we feared"....

    And anyone that follows the retailers that closely and worries about real time consumer or macro data or does "channel checks" or monitors sales or worries about cotton prices (remember that short term fear) is just wasting their time on the noise. Not so say that some retailers can't go out of business and that all cheap retailers are buys and that some people can't trade the noise and make some money. But I am too old to be bothered by all that stuff.
    Apr 2 01:37 PM | 3 Likes Like |Link to Comment
  • Sirius XM: It Seems The Buyback Has Started [View article]
    Googer, are you referring to me?

    I have no interest either way in SIRI. I saw this article in my in box and read it and thought I would clear up what appeared to be misconceptions about the workings of a stock buy back as it related to SIRI. It is unclear to me how giving out factual information to clarify the understanding of part of the investment thesis on SIRI would be considered "bashing".

    An investment, long or short in SIRI will be successful over time based on the fundamentals of the company and not really be influenced by a post on any website.
    Mar 27 10:51 AM | 3 Likes Like |Link to Comment
  • The Greatest Farce On Wall Street [View article]
    Thank you for the mention in your article. We completely agree that the earnings game is a farce and choose not to participate in it either. We encourage investors to start with a "blank sheet of paper" when trying to guess (yes it is really a guess) what a company might be able to earn in the future. Don't start with WS concensus and then try and make your model give you the "right" answer of consensus. Sometimes your numbers will be similar and sometimes they will be different. Doing the work and understanding the difference is more important than the ending number. There is no way to do that without spending a great deal of time looking at the company's (and competitors') business model from the ground up. Too many investors start with a stock price and a story. But the stock represents ownership in a real business and long term value is created by earnings.

    1. Start with historical numbers and try to understand how the business works to understand which aspects of sales and costs are the most variable and why.

    2. Coming to a single point earnings estimate is ridiculous. We do many "what if" scenarios to assess what we consider to be a "reasonable" range of outcomes. Sometimes range is very very wide, but that is what it is. We are not worrying about making our numbers look like consensus, which is a huge pressure on WS analysts. Sometimes our numbers do fall into consensus and that is fine. Too often analysts "begin with the end in mind" and start with consensus earnings estimates and work backward to make the numbers fit. With our independent research product (shameless plug!!) we have talked to management to learn more about a company and have been asked "will your estimates be included in consensus estimates?" That is a good example of the game the author speaks of. Stepping outside of a small range is discouraged by company management as well and WS research directors.

    3. We do look at WS estimates and are looking for estimates where the estimates looks reasonable, but range of outcomes is much wider that it would seem. For example, there is a company we follow that has earnings estimates for 2014 of $0.40 per share and 2015 of $0.57 per share. However, the low estimate for 2014 is $0.30 and the high estimate for 2015 is for $0.75. In 2014 alone the range is $0.30-$0.60 and we are half way through the year!!!! Talk about "uncertainty"!!! That indicates a significant divergence of opinion on the earnings power of this company. This is where we find potential opportunity if we can gain a better understanding of the company's prospect. Although, our edge usually comes from getting it more "right and wrong" two or more years out. Compare that estimate range to something more mundane like MCD where the range for 2015 is just $6.05 to $6.55 with the average being $6.25. Look at AMZN's earnings estimates where the average for 2015 is $3.30, but the range is $0.93 to $6.92!!!!!

    4. When looking for short ideas, the opposite can work. If all the estimates are in a tight range, there is strong consensus on earnings and the multiple mostly likely reflects that "confidence". It is much easier to have a negative earnings "surprise" when consensus among analysts and investors is high and tight. Sometimes the company's model is fairly predictable and a narrow range is expected (think utilities or staples), but other times it seems like complacently has set it. 

    5. We actually like to see WS models on companies we are analyzing. We can usually spot where we think analysts are being "aggressive" or shockingly "conservative" in the assumptions. This is where we start are focus to see if we have a differentiated view of the company's ability to earn net income.

    Finally, pay little attention to price targets. Not only are they based on the flawed analysis as the author points out, they can also be driven by WS agendas. For example, a couple of years ago there was a company our firm was long and two major firms (Goldman and JPM) had coverage on it. As is typical, Goldman was bearish and JPM was bullish. Goldman had a sell and JPM had a buy. Goldman's price target was something like 15% below JPM's. But what was interesting was that their earnings estimates for the next two years were virtually identical. So what was going on? JPM was putting a higher multiple on the out year's earnings estimate and Goldman was putting a lower multiple on current year's estimates. 14 X $1.00 in EPS vs. 16X $1.10 is the difference between a $14 and an $18 price target!!! So even though they basically agreed with each other on the near term earnings power of the company, they came to significantly different "ratings" on the company.

    Do your own work. Take the time to learn about the company from your own analysis and as the author suggests, ignore the noise and the "beat or miss" chatter in the media and you will be a better investor.
    May 23 12:57 PM | 2 Likes Like |Link to Comment
  • If You Are A Long-Term Investor, Why Are You Listening To Earnings Conference Calls In Real Time? [View article]
    Ahh yep. 20% on 10% is 2%.. I should stop doing math in my head at midnight when I write this stuff.
    May 22 07:50 PM | 2 Likes Like |Link to Comment
  • Buffalo Wild Wings: Growth Model Is Starting To Crack While Risks Grow [View article]
    Very similar to the Sumzero report written last week by Midsummer Capital and highlighted in their Institutional Investor Stock Pitch contest. Even your price target of $100 is the same.

    http://bit.ly/1kiPEFC

    I was a fraternity brother of one of the founders and have followed the company a long time.

    The premise is reasonable. The multiple expansion is certainly unsustainable. Having written investment reports on the both the long short side for over 30 years, I would quibble with your characterization that the 2.3M share decline in shares sold short was a major factor in the rise in the stock price. The long-term correlation between your chart and the stock price seems less clear as well. BWLD is a classic momentum driven long play because it has all the factors momentum investors need. Unit growth in a no growth industry, relatively strong SSS, margin expansion and momentum. While I agree that over-leveraged or over weighted shorts can be their own worst enemy (just like leveraged longs can become forced sellers), that is probably not the case here. No doubt the shorts had to reduce their positions as the stock has gone up 80% or whatever (70% decline in the number of shares short vs. 60% decline in the value of those shares seems to indicate that in aggregate the short sellers were reducing exposure due to dollar exposure more than share count exposure).

    High fliers's stock prices decline, not because the shorts push it down (as the main stream media and many investors seem to believe), but eventually the "story" or the numbers turn in a way that turns momentum buyers into sellers. Shorts need longs to give up and turn demand into supply, which almost always eventually happens. Especially with high EV/EBITDA names. Outside of Fidelity, which has certainly turned into a momentum shop vs. their old research focus, most of the top holders are passive indexes and ETF which buy on the way up and sell on the way down. Fido has turned into a seller and holds 13% of the shares. They will eventually be the ones to help the shorts out I would think. Shorts can add to the momentum selling by supplying more stock with short sales, but longs can supply much more stock faster and be more aggressive at hitting bids in size and when you add the lack of buyers because of negative momentum you decline your multiple contraction.

    You are correct to point out that with almost every growth restaurant company that is public, the company eventually expands its store base into lower and lower return markets in order to maintain its growth multiple and that eventually impacts ROICs, first with lower asset turns (lower unit volumes), then with lower margins (Occupancy and operating costs are higher as a % due to lower unit volumes) and growth rates. This eventually translates into lower growth rates and hence, a lower multiple. Building smaller stores is a classic sign of this. The Law of Large numbers eventually catches up to every rapid grower. You can't constantly increase your YOY unit growth in order to maintain or accelerate store growth.

    So far in its history, wing price spikes have almost always been recovered within two quarters of their first impact on gross margins. I have looked at this as a short for years and that has always been one of the short points. If you go back over the last 10 years and look on a quarterly basis, I believe you will see in every instance, gross margins recovered from the spike in wing prices. Swings in commodities in restaurants is just a part of the biz. BWLD is wings, others is fish or beef or wheat. Changes in those commodities (up or down) has never really been a long term driver of the long or short case in a restaurant unless something permanently alters their pricing and value proposition and there are no substitutes or their competitors have some way to get supply at an advantaged price.

    But like I said, the premise is reasonable, mean reversion and lower ROICs will eventually will lead to lower growth and therefore a lower multiple. It could happen over a long period of time (WMT) or a short one (any teen retailer it seems).
    Dec 18 03:22 PM | 2 Likes Like |Link to Comment
  • WPX Energy Trades Below Tangible Book Value, Smart Investors Are Buying [View article]
    Richard,

    Thank you for your comment. As non-energy company experts we welcome any insight you can present on this company.

    As far as the 4.1 TCF of nat gas number, Barbee appears to be using the number derived using the alternative price scenario provided on page 10 of the 10K. It is also on slide 17 of the Howard Weil presentation. It is my understanding that this scenario uses the 12-month average, first-of-month price during 2011. I have seen some comment letters about using this calculation compared to the "SEC Case" scenario. Here is a link to one such letter. http://1.usa.gov/11etpZ8

    Of course, depending on the direction of nat gas, this alternative scenario could boost reserves (as it has in this case) or lower them. I think the idea is to make a current year's reserves comparable to the previous year's reserves holding price steady from the previous year. I would love to hear your thoughts on the merits or lack there of of those two types of calculations.

    The NGL number from the table also seems to be derived from the alternative scenario that shows 4.1 TCF (4.07 TCF to be exact) referenced above.

    As far as the PUDS. It is my understanding that this is also a "squishy" number because it involves an assessment by management and the time line for development is limited to a 5 year time horizon. I believe a company must move PUD reserves to possible if the five year test is not satisfied, which would lower WPX's total proved reserves. It is also my understanding that part of the reason for this test was the "suspicion" to use CHK's wording, that some companies were/are booking PUDs that they never were intending to drill, which would inflate their proved reserves and therefore their NAV. Is my understanding correct on all this?

    As far as the $1.25 for proved reserves (I believe Mr. Gottfried is using a number over $1.35 per Bcfe in his presentations), I simply relied on their analysis and presented it here. If there is a better methodology or price point, please share it because it would be a good point for investors to consider.

    I do believe the other assets and liabilities you mentioned are netted for their purposes. The scope of this article was not intended to be that exact. Our work tends to be more general in order to by "generally right" and not try to be "precisely wrong." I think that anyone reading this article should do their own calculations and make their own decisions about how precise they want to be. A reasonable case can be made to net all of these together.

    As your comments point out, investing in E&P companies using NAVs requires a large leap of faith in the sense that most of the numbers used in deriving that number require estimates on the part of management or others that are, in fact, largely unknowable until after the fact. The discount to NAV "book value" case is certainly much weaker (much wider potential outcome scenarios) than a discount to "tangible book value" case.

    We would love to know if you have any insight into as to why this company is trading at a discount to tangible book value. It is a question we could not really figure out.

    As far as discounting back the G&A, I will have to look closer at that. One thought that comes to mind is that even this calculation may have a wide range of outcomes. Would a multi-national or large E&P company with a large amount of G&A assume that it would require that level of G&A to develop those assets or would it consider most of that G&A unnecessary and believe that it would require just a small amount of incremental G&A? This might lead to a small haircut to the capitalized G&A portion. A private equity buyer would probably have to use the whole amount since it wouldn't have any G&A in place to develop the reserves. As far as a cap rate, 8X seems reasonable. Let me think about that a bit more.

    Sorry for the "we" and "I" change in the article, but Gregg and I are more familiar with different aspects of all this.

    Again, thank you for your comments. Your expertise and understanding of the E&P space is multitudes of ours and your comments will certainly add to the ability of us and others to better understand the company's prospects.

    Tim
    Jun 14 11:50 AM | 2 Likes Like |Link to Comment
  • Texas Pacific Land - The Ultimate Buy And Hold Stock [View article]
    Here is a link to the largest shareholder of TPL, Horizon Kinetics (21%) and their recent thoughts on the copmany. This was published in April.

    http://bit.ly/13Fm7fn
    Jun 5 10:26 AM | 2 Likes Like |Link to Comment
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