???what the hell is tudor trying to say

[setliff]

Stop chasing energy co. growth -Tudor Pickering 01/18 02:33 PM

* Investors, companies need to focus more on returns
* E&P growth now coming at expense of returns
* Top companies include Brigham, Occidental
* Bottom companies include Chesapeake, EXCO (Adds researcher's comments, other details)
By Anna Driver
HOUSTON, Jan 18 (Reuters) - Investors need to stop rewarding oil and gas companies for chasing growth, a pursuit that worked in the past but is now consuming too much capital, analysts at Tudor Pickering Holt & Co said in a self-described "manifesto" on Tuesday.
Instead, the focus should be on capital efficiency, returns and margins, the Houston-based investment bank and research firm said.
"What we want is a shift in the investor and company mind-set to not just chase growth anymore," David Heikkinen, head of research at Tudor Pickering, said.
While noting that exploration spending in recent years has uncovered vast reserves of natural gas, the firm cautioned the business continues to consume too much capital and in many instances destroys value in the pursuit of growth.
U.S. oil and gas companies spent heavily to lease acreage and drill for natural gas when those prices soared to double digits in 2008. Now hefty supplies are weighing on prices and many producers are now in a race to find oil.
"The business has changed and the cycle has changed," Heikkinen said, adding that heavy spending on oil exploration will not guarantee better returns.
As a result, Tudor Pickering is now using new measures to rate oil and gas companies.
The firm's model favors companies that demonstrate the ability to make money at current oil and gas prices, focus on margins and costs, invest in high-return projects and treat reserve and production growth as an outcome, not a target.
The firm's top companies using its new measures are Brigham Exploration Co (BEXP:$28.44,00$0.08,000.28%) , Occidental Petroleum Co , Oasis Petroleum Inc (OAS:$29.68,00$0.6800,2.34%) , Carrizo Oil & Gas Inc (CRZO:$33.87,00$-0.12,00-0.35%) and Continental Resources Inc.
Tudor Pickering's bottom five companies are Southern Pacific Resource Corp (STPJF:$1.8015,$0.0736,4.26%) , Stone Energy Corp (SGY:$23.4525,$-0.0475,-0.20%) , EXCO Resources Inc XCO.N>, Goodrich Petroleum Corp (GDP:$19.9700,$-0.4400,-2.16%) and Chesapeake Energy (CHK:$27.68,00$0.0200,0.07%) .
Still, Heikkinen noted that Chesapeake, which has shifted its business model toward oil

[dan_s]

I agree that we need to find companies that are makeing money at the current commodity prices but I believe that growing proven reserves is the key to share price growth. Isn't an E&P company really worth the value of its reserve base + development & exploration upside?

My focus is on:
> Strong management teams with a proven track record
> An Asset base and growth plan I can believe in
> Strong Balance Sheet with enough cash flow plus financial flexibility to carry out their growth plan
> Heavily weighted to oil production and reserve growth

[la_john]

Hello everyone - I'm new to the board. I also don't get what they mean by "chasing reserves." After all an E&P company needs to replenish its depleting assets in the ground. My concern is with the term "proven reserves." From my understanding not all proven reserves are created equal. Some appear to cost more to bring the product to the surface/market. However, assuming proven reserves are tangible, is there a metric that compares an E&P company's proven reserves to its market cap. It seems to me that you can make an argument that an E&P company has two valuations, 1) its EPS or cash flow per share and 2) its proven reserves to its market cap/outstanding shares.

[dan_s]

The 3rd party engineering report that is required by all public E&P companies includes a present value calculation. The PV10 calculation includes all the capital costs and operating expenses to develop the reserves.

Firms that use Full Cost Accounting must apply a Ceiling Test each quarter. If the book value of producing properties exceeds the present value they are required to write down the assets. Companies that use the Successful Efforts method have a similar test on a property by property basis. Successful Efforts is a more conservative accounting method.

[bobs]

PV "10" I think means a discount rate of 10% is being used and is apparently somewhat standard for E&Ps????
Doesn't that likely understate the likely value of the production in a low interest rate environment??
Thanks for clarification of this term.

[dan_s]

Yes, PV10 = Present Value discounted at 10%. It is the industry standard and required by the SEC.

Pick any E&P and look at their annual report. The reserve valuation must be reported in a footnote. For E&P companies it is the most important part of the annual report.

For our Sweet 16, you can find the 2009 reserves on the S-16 Spreadsheet. They will be updated when annual reports come out.