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Richard Zeits

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  • Kodiak Oil & Gas: Conservative 2014 Guidance? [View article]

    In that sense I totally agree.
    Dec 21 01:18 AM | Likes Like |Link to Comment
  • Kodiak Oil & Gas: Conservative 2014 Guidance? [View article]
    Hi Roger,

    I think dividends are generally unusual in the US E&P sector, there is nothing out of norm in that regard. North America is acreage long and capital short. So good operators should be able to find high-return applications for free cash flow and dividend would be surprising as a priority.

    One can calculate value of existing production plus business plan that the company is executing. The former is often relatively transparent, the later is typically very tricky and subjective.

    However, in many cases the market uses a pretty good collective judgment.

    To answer your question, it may make sense to sell if total value of the assets and business plan is substantially lower than the stock price (and buy if the opposite is true). This does not mean of course that commodity prices cannot change dramatically or the company cannot leases acreage in a new promising area, rendering the old valuation irrelevant.
    Dec 20 07:14 PM | 1 Like Like |Link to Comment
  • Kodiak Oil & Gas: Conservative 2014 Guidance? [View article]

    I am not sure I would fully agree. It is true, the declines are steep, but new wells are prolific and compensate.

    I define "self-financed" operation that does no rely on additional borrowing or equity issuance. Then the question is, while spending at cash flow, does the company's business contract, stay unchanged, grow, or grow very fast. I look at Cabot and see 50% growth while spending fairly close to cash flow (actually turning a surplus next year and beyond). Some other companies spend two times the cash flow and grow by 15%.

    Based on everything I see, KOG drills positive-NPV wells. In that sense, they should be able to replace their production and have some surplus to drill additional "growth" wells. Question is, how impressive is the organic growth rate? Is it 10%? 20%? 30%? I guess, we should know soon. A 30% organic growth rate would be a home run, in my opinion. A 20% rate may be not all that bad after all either, although one would need to start looking at the valuation very carefully. Will 10% would be enough to make everyone happy? Well, this is I guess a topic for a separate article...
    Dec 20 03:56 PM | 1 Like Like |Link to Comment
  • Kodiak Oil & Gas: Conservative 2014 Guidance? [View article]

    Let me try to take a slightly different angle on this. It is sort of irrelevant at this point if older wells are money losing, profitable or super-profitable. What is done is done (sunk cost). We do care about the residual value of those wells (which, in the case of KOG, at the end of Q2 stood at $2.1 bn using a 10% discount rate). Question is, are new wells profitable enough. Very simply, if a company spends all its internally generated cash and leaves nothing for dividends, it'd better show some growth in the value of its business. If an E&P company is operating in the same areas, growth in production is a rough proxy for the growth of the business (and as a measure excludes the impact of commodity price that can flactuate widely and impact the value of the business, but is out of the company's control). Hence the market's fixation on production growth rates.

    What often happens however nowadays, companies spend far beyond what they generate in cash flow, via borrowing or asset sales. With the type of declines we see in the Bakken and other plays, front-end production is vigorous. Therefore, it is not difficult to show growth. However, maintaining that type of growth would be very difficult over time if drilling is not truly profitable. In the short term, it may be tricky to discern the degree of operating profitability behind massive reported growth rates financed with borrowed funds.
    Dec 20 02:29 PM | 3 Likes Like |Link to Comment
  • Kodiak Oil & Gas: Conservative 2014 Guidance? [View article]

    I am afraid you are overstating the average per-day production for a type well over the first year. Even if you take bigger wells (let's say 750 MBo EUR - which in fact may be substantially above average), those wells cumulatively produce 130-150 MBo in year one. That equates more to a 350-400 Bo/d on average during the first year. Then you have to take out 25% of royalty interest. Please note, these figures are oil only. Oil can be only 75% of total EUR in certain areas. Given that wells often produce less than 25% of the 30-day IP rate within 12 months (and sometimes declines are even steeper that 75% - I am using monthly volumes), you can see that a lot of drilling is required simply to keep the 40,000 boe/d flowing flat.

    This is a reason why i am excited to see the growth rate for KOG from Jan 1 2014 through Dec 31 2014 based on a within-cash-flow budget.
    Dec 20 12:48 PM | 2 Likes Like |Link to Comment
  • Kodiak Oil & Gas: Conservative 2014 Guidance? [View article]

    With regard to the 9% drop: the drop is all concentrated in Q4. You are absolutely right, when spread over the entire year, it equates to less than 3%. But production during the first three quarters remains invariant.

    By the same token, one should be careful when doing the math on decline rates. Please do not kill the messenger, but the Bakken is characterized by very steep declines, and as you can see, operators are on a treadmill of a sort to maintain their production at a flat level, let alone grow it. If new completions schedule is delayed, you can see an immediate very steep decline. This is nothing new of course. Does not mean wells cannot be quite profitable.
    Dec 20 12:34 PM | 1 Like Like |Link to Comment
  • EXCO Resources: Growth To Resume In 2015 [View article]
    Hi Doug,

    Great point on the dividends. I did not include them in the calculation since dividends are discretionary and do not impact EBITDA. However, they can (and do) impact the credit. I am still puzzled what is the point of paying the dividend at the time when the company is essentially $29 million behind on its loan repayment (and is running 100 bips extra on a chunk of its bank borrowing because of that) and has to raise significant new equity. Raising equity to pay it out in the form of dividends? What am I missing?
    Dec 19 01:36 PM | 3 Likes Like |Link to Comment
  • Bill Barrett: Strong Read-Across From Ultra Petroleum's Uinta Acquisition [View article]
    Dec 17 09:08 PM | Likes Like |Link to Comment
  • Eagle Ford Shale: 2014 Will Be The Year Of 'Vertical Downspacing' [View article]

    In the event of U. Eagle Ford/Austin Chalk this typically is the case - the shallower rights are held by drilling for primary Lower EF target (the shallower horizons are also very well mapped out by well control).
    Dec 16 08:32 PM | Likes Like |Link to Comment
  • Bill Barrett: Strong Read-Across From Ultra Petroleum's Uinta Acquisition [View article]
    TOT -

    Thank you for taking the time to read and for the kind word.

    I would just caution that while a strong resource potential seems to be there, Bill Barrett would need to find a way to translate it into growth and profits in Uinta. The company has big plans in the Niobrara, so it remains to be seen how much capital they will have left to allocate in 2014 to East Bluebell.
    Dec 16 12:25 PM | Likes Like |Link to Comment
  • Newfield Exploration: Why Is The Stock Down? [View article]
    The Hammer,

    E&Ps evolve rapidly, so nothing is permanent in their world.

    The group of Marcellus producers is getting into that category: returns are strong but growth is limited by infrastructure, potentially creating a FCF surplus. Cabot is getting into that category.
    Dec 16 12:16 PM | 1 Like Like |Link to Comment
  • Marcellus Shale: 'The 1 Bcf Per Day Club' To Sign Up A New Member [View article]

    That is a great point. I would only comment that New York lands appear less productive geologically than the sweet spots in Susquehanna and liquids-rich areas in the Southwest. So New York may stay on the back burner for some time, benefiting mostly from lower-cost gas supply.

    The greatest impact would be from establishing a liquids processing capacity in the region (e.g., Shell's ethane cracker that seems very much in question).
    Dec 15 08:23 PM | Likes Like |Link to Comment
  • Aurora Oil And Gas: An Unloved And Undervalued Australian Oil Junior [View article]

    I see oil & gas assets at $1,234 million as of Q3 (and fail to find a goodwill line item), but what does balance sheet have to do with the value of reserves? Balance sheet reflects historical measures, not economic measures.

    Still not sure I understand how the PV-10% calculation is derived (by the way, what are you using for proved developed reserves at the end of Q3?)
    Dec 15 03:38 PM | Likes Like |Link to Comment
  • Aurora Oil And Gas: An Unloved And Undervalued Australian Oil Junior [View article]

    Thank you for your response. The reason I commented, I found that the result of your valuation actually does not reconcile well with the company's public financials. I was hoping you would explain the difference - perhaps you see what I don't. And I was intrigued by the exploration assets you said the company had (still scratching my slow head what those might be).

    Anyways, thank you for the article and for your feedback. I guess I have all the info I need.
    Dec 15 02:28 PM | Likes Like |Link to Comment
  • Aurora Oil And Gas: An Unloved And Undervalued Australian Oil Junior [View article]

    Just to follow up on the valuation, I have looked at reserve valuations that the company provided back in April and I am really struggling to match the $1,848 million for 2P reserves that you are suggesting.

    The company was using the following valuations: ~$31.50/boe for PDPs, ~$9.40/boe for PUDs and ~$7.20/boe for Probables, all at 10% discounting that you are using. These valuations make sense to me.

    When I apply these metrics to 3Q reserves, I arrive at ~$1.3 billion valuation for 2P reserves. Even if I stretch my assumptions in a variety of ways, I may be able to add another $100-$200 million to that value. Still far below your estimate. What am I missing?

    By the way, the company valued its possible reserves at ~$3.80 per boe, using 15% discount rate (probably be the minimum one would need to apply). Using their per boe valuation, I come out with $200 million for the possibles at the end of Q3, far below your $700 million. Again, what am I missing?
    Even when I factor in the Upper EF potential, I struggle to conclude that the stock is undervalued, let alone the 60% upside that you suggest there is.
    I am intrigued to better understand your calculations. Thank you in advance.
    Dec 15 01:33 PM | Likes Like |Link to Comment