what to look for
what to look for
Hey Dan,as a person who is pretty much confused reading all these quarterly reports can you point out a couple of items to look for.SM WLL CLR MTDR have all reported in the last 2 days.My background is not in accounting.Maybe you can help me focus on a couple items to distinguish good from bad.TIA Sam
Re: what to look for
Cash is King. Focus on cash flow from operations.
Keep in mind that "impairment" does not equal "abandonment". The oil & gas did not go anywhere and they still own the leases. The reserves that SEC rules required them to write down will be written up again when prices go back up. However, impairment charges are never reversed.
On all of my forecast models, I clearly set out operating cash flow per share (a few rows under net income). That is a much more important number than earnings per share. Actually, EPS is almost a worthless stat for upstream companies anyway. I also put a red box on each forecast model that shows what First Call's cash flow per share estimate is for each company.
DD&A, Impairment, Accretion, Stock Based Compensation and Deferred Income Taxes are all common non-cash items that have zero impact on a company's ability to pay its bills.
If you are worried about a company going bankrupt (i.e. Gastar), go to the company's forecast model on the EPG website and look at the row that says "Cash Flow From Operations" or just "Cash Flow". AS LONG AS THAT NUMBER IS POSITIVE, THE COMPANY WILL NOT GO BANKRUPT.
As long as a company is paying vendors and the interest on the debt, there is very little chance of it needing to file for Chapter 11 protection. It is never in the bank's best interest to force bankruptcy. No doubt there will be a few, but not as many as Wall Street is expecting. There will be a lot of oilfield service firms that do go that route.
Keep in mind that "impairment" does not equal "abandonment". The oil & gas did not go anywhere and they still own the leases. The reserves that SEC rules required them to write down will be written up again when prices go back up. However, impairment charges are never reversed.
On all of my forecast models, I clearly set out operating cash flow per share (a few rows under net income). That is a much more important number than earnings per share. Actually, EPS is almost a worthless stat for upstream companies anyway. I also put a red box on each forecast model that shows what First Call's cash flow per share estimate is for each company.
DD&A, Impairment, Accretion, Stock Based Compensation and Deferred Income Taxes are all common non-cash items that have zero impact on a company's ability to pay its bills.
If you are worried about a company going bankrupt (i.e. Gastar), go to the company's forecast model on the EPG website and look at the row that says "Cash Flow From Operations" or just "Cash Flow". AS LONG AS THAT NUMBER IS POSITIVE, THE COMPANY WILL NOT GO BANKRUPT.
As long as a company is paying vendors and the interest on the debt, there is very little chance of it needing to file for Chapter 11 protection. It is never in the bank's best interest to force bankruptcy. No doubt there will be a few, but not as many as Wall Street is expecting. There will be a lot of oilfield service firms that do go that route.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group