Energy Prospectus

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

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.

Excellent question. Excellent, helpful reply. Thx to you both.

Great response and thank you for taking the time to elaborate !

Thank you. Very helpful