Energy Prospectus

A good rule of thumb for valuing an E&P stock is 6X CFPS.
> If production and reserves are on the decline or the company carries too much debt, the multiple should be lower.
> Higher multiples are justified for companies with growing production and reserves and/or exceptional exploration upside (Examples are EXXI, FXEN, GTE, PMG and TGA).

As of the December 16th closing prices, nine of the Sweet 16 are now trading below 5X 2011 cash flow per share. For each of these companies I'm expecting them to increase CFPS in 2012.

The combined CFPS multiple (Share Price / Cash Flow per Share for 2011) for the Sweet 16 is now 5.6. I cannot remember it being this low in the eleven year history of the Sweet 16 Growth Portfolio.

EPG Members can find the CFPS multiple under Column U in our Sweet 16 Spreadsheet. Just log in and click on the Sweet 16 Tab, then click on "Sweet 16 Forecasts".

Three companies are trading at less than 3X CFPS, which IMO is ridiculous since all three are heavily weighted to oil and two of the three will be reporting strong production growth in the 4th quarter.

5 of 7 onshore drillers on our Watch List are now trading at less than 4X 2011 Cash Flow Per Share. These are insane valuations for companies with rock solid earnings and cash flows locked in by long-term rig contracts.

Demand for the big onshore rigs is very strong in all of the shale plays. Drilling budgets for almost all of the E&P companies are look at are going up in 2012.

The onshore drillers are shown in a table at the bottom of our Watch List, which was just updated. Just log in and click on the Watch List tab to get it.

Onshore Driller Pricing:

The reason is simple - fear of Obama and Lisa Jackson. How long will the Obama/Jackson uncertainty last for fraccing?

Bob

Well, for sure the "uncertainty" will be gone by Jan, 2013!!

They are not going to ban fracing. If they did the price of oil and natural gas would go through the roof and the economy would go off the cliff. The democrats know this.

Remember, a lot of the stuff that comes out of Washington is just pandering to their support groups.

Totally agree - but that does not stop the discount in the drillers. Fear of a similar political stunt like the GOM Obama disaster lives. IMO some form of increased regulation (government control) is coming.

We only need look at the Keystone Pipeline to understand the depth of pander to green money men who fund his campaign.

Ultimately, in the problem lies the opportunity. I think the problem must diminish - meaning the new regulations must be defined - before the opportunity is realized.

Bob

The EPA's Fracking Scare
Breaking down the facts in that Wyoming drinking water study.

http://online.wsj.com/article/SB1000142 ... on_LEADTop

Here's a nice recap/opinion from the IV BRY BB:


Re: Pavillion never had water fit for domestic consumption

The EPA's assessment was a political statement not a scientific one. They didn't make that many mistakes due to scientific error. They did it purposefully to get headlines. The idea is to have continuous headlines reporting groundwater problems due to fracking. If those headlines and "facts" are refuted later, this won't matter because the refutation will not typically get picked up in the press at least not with the same kind of coverage nor will environmental types believe a refutation later. They will believe that there has been some kind of cover-up. People within the EPA want to stop the proliferation of fracking because it opens up a lot of hydrocarbons for use and causes a lot of drilling in areas some in the EPA would rather see protected. Additionally, some are against hydrocarbons because they believe in global warming. Many in the EPA join that agency because they believe in the environmental "cause". The Obama administration has provided them with power to move forward on some of their agenda. Not an unlimited amount of power but enough for things like this.