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I am a fundamentally oriented value investor who complements this with technical analysis to help optimize price points selected for buying and selling. In terms of valuation, I tend to focus on enterprise value calculations, such as EBIT against enterprise value. One quick test I do to... More
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  • One Graph Shows Where The Prices Of Coal Companies Are Heading

    Sometimes one picture really is worth 1000 words. If you chart the price of almost any coal producer - in this case we pick on Peabody (BTU) - against the price of natural gas commodity (using the end of day index $NATGAS), what is immediately clear is that coal companies that are producers peak when natural gas commodity peaks. There is a time delay, but the relationship itself stands out clearly from the overlay time graph below.

    What the chart below shows is that natural gas pricing has now hit a cyclical low that is below the pricing of a decade ago. And if the relationship between coal commodity pricing, natural gas commodity pricing, and coal producer pricing holds, this means coal producers are on the way back down to lows they have not seen for a decade.

    I do not believe the coal producer lows made in 2009 will hold. I think most coal producers - particularly those burdened by debt and expensive top-of-cycle acquisitions - will go through their 2009 lows like a knife through butter. These cyclical stocks are about to hit on hard times, and those hard times will continue through at least 2015 or 2016, when natural gas starts to be exported as LNG and finally natural gas pricing can rise above levels dictated by domestic North American demand alone.

    If this chart is suggestive of future coal producer stock prices, then buying coal producers at this point in the cycle is a huge mistake. And beyond the point that stock prices will fall, many of these companies have huge debt and maturities that will come due before 2016. We should not be surprised to see one or more of these companies enter Chapter 11 in the next few years.

    BTU Price Aligns With Natural Gas Pricing

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: BTU, Coal NG Gas
    Apr 10 11:33 PM | Link | Comment!
  • Quick Calculations On ATLS Barnett Shale Acquisition
    Assume $1.9 Billion USD of capital expenditures is required to extract (actually produce) 1 Tcf of proved reserves. I am taking this data point based on Peyto in Canada, which publishes a number of $1.8B of capex per Tcf. Peyto is one of the most efficient producers in North America. If someone has a better number please give that.

    Assume variable extraction costs for 1 Tcf of $400M. I lack a good reference number for this and I would appreciate some data points from others.

    Together that gives $2.3B of total costs required to extract 1 Tcf of gas. Figure $2.3 of all-in costs - variable plus capex - for each MCF of gas.

    Assume selling price of gas is $3 long term. That gives $3B of revenue versus $2.3B of costs, or $700M net cash out. Now take a 20 year net present value of $700M with a 10% discount rate. That gives NPV-10 of $297M, versus our effective payment for the resource of $690M.

    I'll save you some calculating: I worked out that the payment of $690M assumes a long term gas price of $3.92 to just break even.

    Now here is where it gets a little shaky for me: notice I did not add the price we paid of $690M 1 Tcf equivalent to the total all-in cost. The reason for this is that the acquisition includes 198 producing wells. So my assumption is that we have already paid for some of the capex in the form of those wells. Figure $2M per well or about $396M of capex in place. The rest would be a payment for reserves. The trick is how much more capex do they need to spend to fully exploit the resource, and that's not clear.

    It does not strike me as any kind of sure thing. It looks like the market is valuing the deal based on just the increased distributions.

    Bottom line is that if we were buying pure reserves we would want them at a substantial discount to $297M assuming a $3 long term spot price for dry natural gas. It is not clear how much useful capex we got (these wells could be marginal). At $690M, it's not an obvious steal.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: ATLS
    Mar 17 4:23 PM | Link | 1 Comment
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