Re CRK this weeks podcast
I like the new addition and calculation of net realized prices and impact of hedges
Great addition!
Fantastic models
Question's: Why do you operating cash flow instead of FCF? Some models have 4.0 x, 4.5 x 5.0 why the difference.
I personally like FCF/ EV to arrive at a yield and I like to see a 20 % hurdle rate. Just curious not trying to nitpick
New models Net realized prices
Re: New models Net realized prices
I value companies based on operating cash flow vs FCF because my focus is on growth of equity value.
> Operating cash flow funds production and proven reserve growth. At any point in time, an upstream oil & gas company should be trading close to the PV10 Net Asset Value of its 2P reserves (Proved + Probable). BTW the SEC rules for what is now P1 reserves is extremely conservative. Most of the P2 reserves of the shale companies are (in my opinion) proved reserves (P1).
> Any upstream company can generate significant free cash flow simply by halting their drilling program and depleting out their proven reserves. < This is called the "Blow Down Case". Both of our Canadian Juniors (HMENF and IPOOF) are trading at a discount to their blow down case valuations.
> FCF is definitely great and the Wall Street Gang is focused on it. I just posted an updated profile for Devon Energy (DVN), a company that is generating massive FCF and is still funding low single digit production growth. It deserves at least an 8X valuation multiple, but I am using just 7X to value the stock because of overall market risk. < All 26 companies in our Sweet 16 and Small-Cap Growth Portfolio are generating FCF from operations.
I use different valuation multiples because I look at balance sheet strength, "running room" (lots of low-risk drilling locations), the management team and the ability to fund double digit production growth entirely with operating cash flow. If an upstream oil & gas company gets an "A" in each area, it should be trading for around 8X operating cash flow per share.
I am still using some low valuation multiples for some very good companies just because the overall market is very tough these days. There is still a lot of FEAR of the Fed and other risk factors, including our own stupid government. Supply chain issues are also a concern.
I also have different levels of confidence in my forecast models. Some companies provide much better guidance than others. That said, I do feel VERY GOOD about all of companies in our three model portfolios today.
> Operating cash flow funds production and proven reserve growth. At any point in time, an upstream oil & gas company should be trading close to the PV10 Net Asset Value of its 2P reserves (Proved + Probable). BTW the SEC rules for what is now P1 reserves is extremely conservative. Most of the P2 reserves of the shale companies are (in my opinion) proved reserves (P1).
> Any upstream company can generate significant free cash flow simply by halting their drilling program and depleting out their proven reserves. < This is called the "Blow Down Case". Both of our Canadian Juniors (HMENF and IPOOF) are trading at a discount to their blow down case valuations.
> FCF is definitely great and the Wall Street Gang is focused on it. I just posted an updated profile for Devon Energy (DVN), a company that is generating massive FCF and is still funding low single digit production growth. It deserves at least an 8X valuation multiple, but I am using just 7X to value the stock because of overall market risk. < All 26 companies in our Sweet 16 and Small-Cap Growth Portfolio are generating FCF from operations.
I use different valuation multiples because I look at balance sheet strength, "running room" (lots of low-risk drilling locations), the management team and the ability to fund double digit production growth entirely with operating cash flow. If an upstream oil & gas company gets an "A" in each area, it should be trading for around 8X operating cash flow per share.
I am still using some low valuation multiples for some very good companies just because the overall market is very tough these days. There is still a lot of FEAR of the Fed and other risk factors, including our own stupid government. Supply chain issues are also a concern.
I also have different levels of confidence in my forecast models. Some companies provide much better guidance than others. That said, I do feel VERY GOOD about all of companies in our three model portfolios today.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: New models Net realized prices
Excellent question. Excellent, helpful reply. Thx to you both.
Re: New models Net realized prices
Great response and thank you for taking the time to elaborate !
Re: New models Net realized prices
Thank you. Very helpful