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  • Bullish View for Natural Gas: Which Stocks Will Benefit? [View article]
    Here's a TV interview I gave yesterday on Canada's Business News Network on natural gas:

    watch.bnn.ca/clip32514...
    Jul 15, 2010. 03:33 PM | Likes Like |Link to Comment
  • Chesapeake Asset Value as Explained by CEO [View article]
    I don't doubt that he's sincere, it's just a question of whether he's right or not and whether he's prudent in his approach.
    Jul 14, 2010. 11:35 AM | 7 Likes Like |Link to Comment
  • Chesapeake Asset Value as Explained by CEO [View article]
    It is striking how much difference there can be between estimated value for some of these assets. For example, some research from JPMorgan in March valued CHK's Marcellus holdings at $8.8BN (this is PV10 but before extraction costs, G&A, taxes) versus Aubrey's $15BN. After these estimated costs you get to around $5.7BN, a third of CHK's assessment. Reasonable people can evidently disagree. We don't own CHK because of their past high risk appetite (though they may have found religion on that issue now). I can understand why it has a following though.
    Jul 14, 2010. 10:10 AM | 8 Likes Like |Link to Comment
  • Does DRP Have a Constructive Response to Reasonable Concerns? [View article]
    I don't know why Morningstar gives it four stars, Unfortunately they're not clear on the reasons on their website. I doubt it's the fund where Deutsche have made you alot of money though.
    Jul 13, 2010. 08:40 PM | Likes Like |Link to Comment
  • Bullish View for Natural Gas: Which Stocks Will Benefit? [View article]
    No doubt the information provided on the calls is accurate, but it's not presenting a full picture. CHK's 2009 10K shows a net loss of $5.83BN, driven largely by a writedown on previously bought properties of $11.13BN. This would have built up over many years. So obviously their return on capital and equity was negative in 2009. But if you generously allow for no writedown in 2009 (and CHK was certainly not alone in this regard) restating their NI and stockholder's equity gets you to an adjusted 2009 NI of $1.42BN, an ROE of 6% and ROA of 3%. Their cost of capital is clearly higher than this. So both items are no doubt true - good operating margins and low returns on capital. Many of these firms are constantly reinvesting in new properties, deferring profits into the future. We avoided CHK because they have shown such a high risk appetite, but they have shown they're good at acquiring attractive properties. Their 1Q10 10Q shows a return on capital in their E&P segment of around 9% p.a. There were no writedowns in that quarter but even so this is not appreciably above their estimated WACC which I imagine is why they trade just slightly above book value.

    This all just points to caution in the sector, since low return on invested capital could prevail for some time, and is why we focused on some of the less levered names that can sustain their operating models.
    Jul 12, 2010. 11:02 AM | 1 Like Like |Link to Comment
  • Bullish View for Natural Gas: Which Stocks Will Benefit? [View article]
    The NAV calculations are adjusted for net debt (i.e. debt less cash). Different analysts may arrive at different NAVs due to their estimated extraction costs and also because of haircuts on risked reserves. Particularly with HK, a substantial percentage of their reserves are risked rather than proven. I haven't looked at the S&P figures so can't speak to those specifically.
    Jul 11, 2010. 07:40 AM | Likes Like |Link to Comment
  • Bullish View for Natural Gas: Which Stocks Will Benefit? [View article]
    I do agree that there needs to be a more focused Federal response to the environmental concerns that have been raised. I think it's in everybody's long term interests for that to take place.
    Jul 11, 2010. 07:36 AM | 1 Like Like |Link to Comment
  • Bullish View for Natural Gas: Which Stocks Will Benefit? [View article]
    We own some MLPs in a different strategy. We really just buy and hold, rebalancing amongst names as needed. It's a very good sector for taxable investors but not an area we actively trade.
    Jul 9, 2010. 10:41 AM | 3 Likes Like |Link to Comment
  • Bullish View for Natural Gas: Which Stocks Will Benefit? [View article]
    The NAVs are derived from reserves less cost of extraction all discounted at 10% (some reserves receive a haircut to adjust for probability of realization). Bernstein and others produce this kind of analysis, the resulting figures are not normally that variable amongst firms. We passed on CHK because their risk appetite doesn't match ours, but no doubt if the thesis is correct they'll do very well.

    re DVN, if the sale to BP doesn't go through we think they can probably find another buyers for those assets.

    XOM just too big to feel we can have any analytical edge.

    To ans DB10, Bernstein argues that while company presentations show good returns on individual shale plays, 10Qs and Ks reveal a different story. We haven't reviewed all the companies they cover in this regard, only those we own.

    The environmental risk of fraccing is not to be ignored. However, the Gasland movie does seem to represent an extreme, "Roger and me" type view. American Natural Gas Alliance (www.anga.us/) holds an opposite view, obviously they have an interest in promoting it. Our conclusion is this is a risk but likely the environmental concerns are manageable.
    Jul 9, 2010. 09:48 AM | 3 Likes Like |Link to Comment
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