PWE - Penn West Petroleum

[Uccmal]

You're all barking up the wrong tree. 

 

The reason the debentures are still not trading down is because most of the recent drop in the stock price is tax loss selling, and concerns the dividend will be cut.  The company is not under financial duress, yet. 

 

There are reasons the dividend has not been cut:

1) PWT is part of the tsx 60.  They are taking this into consideration.

2) Management are large shareholders. 

3) The DRIP

4) So far, they can afford it.  They cut the dividend massively when Rick George took over, before the CEO was replaced.  The dividend was stress tested at the time. 

 

That being said, if oil prices stay down the dividend will go.  For that reason all of my purchases recently have been 2017 Leaps, and I am going to keep right on buying small amounts of these into the year end.  It doesn't increase my position size very much at these prices.

 

 

[SharperDingaan]

Its tax-loss selling season. Anyone with brains is going to dump by the end of the month & buy it back in Feb after the year-end results are announced. Take your loss now, & get your tax refund in April.

 

Oil is at $70, & there is talk of it going down to $55 or less. Cold lifting costs in most parts of the patch are $40-60/bbl, & there is no economical pipeline or rail tanker space to allow additional throughput to lower fixed costs/bbl. Some of the wells are going to get shut in, & probably for quite some time. To survive, the industry will be cutting Capex to the minimum.

 

IFRS requires MTM accounting on joint ventures and minority investments. In the current environment, most MTM adjustments are going to be negative, and they are going to pass through the year-end income statement. Headline stuff, and all negative.

 

Old management probably capitalized a number of marginal wells, which could be either expensed or mothballed according to the

specific economics. Most would take the big bath approach, expense whatever they could into the crappy year-end, and take depreciation & amortization savings from Q1 onwards.

 

O/G has been buoyant for a long time, & there is a lot of denial out there. If management opts to 'bath', it is highly likely that they will also cut the div and reduce the Capex as well - to spread the pain. This thing pays .56/yr (278M/yr) in dividends, & is yielding 16%. If you had bought at higher prices your crux is that high yield; cut it & the support collapses.

 

If they do all this & oil suddenly starts rising again; PWE is going to have a lot of free cash again, no obligation to pay dividends, and a dirt cheap stock price. What are the odds they elect to buy back some of their 490M+ shares.

 

As has already been pointed out, they are going into the perfect storm - but it hasn't hit yet. We can see that it looks like being an evil bastard, but details have to wait until it actually hits.

 

So ... why would anyone not expect this to drop another 30-40% when the sh1t hits the fan?

 

SD

 

[Picasso]

There are hundreds, if not more, oil and gas stocks that have been decimated.  Why is PWE particularly compelling versus some other hard hit securities?  Aside from the fact it has lost almost all of its value.

 

I have never been much of a believer in tax loss selling affecting the share price in a big way.  Maybe it contributes to some of the decline but I don't think you can blame most of it on it.  In fact I would be nervous taking a tax loss in PWE here.  If it is as cheap as everyone thinks, you run the risk of a massive rally in less than 30 days which screws up any tax savings you are trying to achieve.

[kevin4u2]

Below is part of an email between Joel S and I.  I asked if it would be worth it to post these ideas and perhaps ignite a firestorm.  Anyways... here goes. 

 

I generally avoid oil and gas unless I am absolutely sure I am buying the low cost producer.  Never ever forget that when you buy oil and gas you are essentially buying the underlying commodity.  I have no way of telling where oil will go today, or tomorrow, so that is why I typically shy away from commodities.  I only buy if I see a huge margin of safety. 

 

I have industry experience, and I understand the business and valuations.  What most people don't understand is how lower oil prices influences so many factors.  It is not just your near term cash flow.  Reserves will be cut, bankers will be worried, asset write downs will occur in Q4, debt covenants may be broken, and bank lines will be curtailed.  Then add in tax loss selling and the oil sector is in for some pain over the next few months. 

 

I'll take a look at the names you mentioned.  I hope you can see from the MEG graph that the relationship between WTI and asset value per share is very non linear.  Many on COBF believe you can just can apply a discount to account for the falling oil prices. 

 

As for Penn West, here are my thoughts.  First, balance sheet and book values are useless in valuing an O&G firm, I see some making that mistake.  I value using the before tax net present value of reserves discounted at 10 or 15% and add any other assets the company has (at cost) and deduct all debts.  For PWT here is the results.  Please keep in mind that the reserve data is stale, they have made two asset divestments this year ($355 million in Q4 and $175 million early this year).  I made some quick and dirty assumptions to account for this, and I corrected the balance sheet.  The reserve report is based on $90 WTI near term pricing and I made no corrections for the drop in oil prices.  You can add your own haircut to the numbers below.

 

All number in Canadian $, PDP = Proven developed producing, 1P = Proven reserves, 10 or 15 = discount rate, BT = Before tax.

 

Current Share price = $3.33/Share

 

PDP10BT - $3.48/share

PDP15BT - $1.61/share

 

1P10BT - $6.14/share

1P15BT - $3.31/share

 

So if oil was still selling for $90 or if you knew it would go back to that level next year, Penn west is a solid investment and meets my hurdle of 15%.  If you believe oil is going to stay at the $70 level, you will need to cut these numbers appropriately, and significantly.  Most of the value in a NPV calculation is the near term cash flows, as you already know. 

 

If these numbers interested me, which they don't, I would then have to look at the CF need to fund the capex and debt obligations.  The reserve report tells you the capital require to convert proven undeveloped reserves (PUDs) into PDP.  As you can see above, quite a bit of the 1P value is PUDs, not PDP. 

 

You're likely over all my rambling but to add further insult to injury, Penn west has the follow capex assumptions baked into their reserve report, see page A3-8.

 

Forecast Prices and Costs

 

Year

Proved Reserves

(MM$)

Proved Plus Probable Reserves (MM$)

 

2014

1P -  704

2P - 840

 

2015

1P - 973

2P - 1,533

 

2016

1P - 419

2P - 726

 

At the end of Q3 they had spent $485 million in capex.  Q4 will have to be curtailed due to the drop in oil prices and reduced CF.  There is no way in China they will be spending a billion dollars to develop their proven reserves, let alone the over $1.5 billion needed for the 2P reserves next year. 

 

And don't get me started on the dividend.  Why do these crony companies pay a dividend when they don't earn a profit?  It is purely to fool private investors who will pay for yield.  To me it is almost a legal Ponzi scheme where they constantly raise more equity to pay off the prior shareholders.  Take Crescent Point, CPG, they have made no money in the past 10 years but have effectively used their over priced equity to raise more of it or use it to buy other companies. 

 

One last word of caution.  Be wary of the NAV numbers touted by analysts.  If you read the fine print it is often based on a huge number of assumptions the analysts have added.  They also then blend it with a CF multiple, which they feel is accurate, and reach their target price.  All nonsense.  Also throw out all company presentations, all nonsense.  Also when you hear people say the company can drill 100% ROR wells, ask them why don't you see all these nonsense ROR's coming out the back end of the company, in the reported financial statements?  Full cycle and full cost accounting have a way of bringing these projections back to reality.

[yadayada]

I don't think the stock is very interesting here, but the fact that the options seems to be mispriced?

 

You can basicly hedge your risk for free?

 

Buy puts and common,

 

In scenario where dividend is not cut or only partially, you get back part or all of your hedge through dividends in common and from the puts? If it then goes up, you win with the common, and your hedge is almost free

 

In a scenario where they survive, and dividend is cut, oil price most likely goes up within the next few years, and the stock is a multibagger

 

In a scenario where they don't cut dividend, and stock goes down within a few years with bad management, you get paid on your put, and you get some dividends from common and put. You lose most of common, but you get the put for free. And there is still upside because of your put position

 

So only really the scenario where they go under and cut dividend is bad. But that seems unlikely with the CFO they generate. 

[thepupil]

Below is part of an email between Joel S and I.  I asked if it would be worth it to post these ideas and perhaps ignite a firestorm.  Anyways... here goes. 

 

I generally avoid oil and gas unless I am absolutely sure I am buying the low cost producer.  Never ever forget that when you buy oil and gas you are essentially buying the underlying commodity.  I have no way of telling where oil will go today, or tomorrow, so that is why I typically shy away from commodities.  I only buy if I see a huge margin of safety. 

 

I have industry experience, and I understand the business and valuations.  What most people don't understand is how lower oil prices influences so many factors.  It is not just your near term cash flow.  Reserves will be cut, bankers will be worried, asset write downs will occur in Q4, debt covenants may be broken, and bank lines will be curtailed.  Then add in tax loss selling and the oil sector is in for some pain over the next few months. 

 

I'll take a look at the names you mentioned.  I hope you can see from the MEG graph that the relationship between WTI and asset value per share is very non linear.  Many on COBF believe you can just can apply a discount to account for the falling oil prices. 

 

As for Penn West, here are my thoughts.  First, balance sheet and book values are useless in valuing an O&G firm, I see some making that mistake.  I value using the before tax net present value of reserves discounted at 10 or 15% and add any other assets the company has (at cost) and deduct all debts.  For PWT here is the results.  Please keep in mind that the reserve data is stale, they have made two asset divestments this year ($355 million in Q4 and $175 million early this year).  I made some quick and dirty assumptions to account for this, and I corrected the balance sheet.  The reserve report is based on $90 WTI near term pricing and I made no corrections for the drop in oil prices.  You can add your own haircut to the numbers below.

 

All number in Canadian $, PDP = Proven developed producing, 1P = Proven reserves, 10 or 15 = discount rate, BT = Before tax.

 

Current Share price = $3.33/Share

 

PDP10BT - $3.48/share

PDP15BT - $1.61/share

 

1P10BT - $6.14/share

1P15BT - $3.31/share

 

So if oil was still selling for $90 or if you knew it would go back to that level next year, Penn west is a solid investment and meets my hurdle of 15%.  If you believe oil is going to stay at the $70 level, you will need to cut these numbers appropriately, and significantly.  Most of the value in a NPV calculation is the near term cash flows, as you already know. 

 

If these numbers interested me, which they don't, I would then have to look at the CF need to fund the capex and debt obligations.  The reserve report tells you the capital require to convert proven undeveloped reserves (PUDs) into PDP.  As you can see above, quite a bit of the 1P value is PUDs, not PDP. 

 

You're likely over all my rambling but to add further insult to injury, Penn west has the follow capex assumptions baked into their reserve report, see page A3-8.

 

Forecast Prices and Costs

 

Year

Proved Reserves

(MM$)

Proved Plus Probable Reserves (MM$)

 

2014

1P -  704

2P - 840

 

2015

1P - 973

2P - 1,533

 

2016

1P - 419

2P - 726

 

At the end of Q3 they had spent $485 million in capex.  Q4 will have to be curtailed due to the drop in oil prices and reduced CF.  There is no way in China they will be spending a billion dollars to develop their proven reserves, let alone the over $1.5 billion needed for the 2P reserves next year. 

 

And don't get me started on the dividend.  Why do these crony companies pay a dividend when they don't earn a profit?  It is purely to fool private investors who will pay for yield.  To me it is almost a legal Ponzi scheme where they constantly raise more equity to pay off the prior shareholders.  Take Crescent Point, CPG, they have made no money in the past 10 years but have effectively used their over priced equity to raise more of it or use it to buy other companies. 

 

One last word of caution.  Be wary of the NAV numbers touted by analysts.  If you read the fine print it is often based on a huge number of assumptions the analysts have added.  They also then blend it with a CF multiple, which they feel is accurate, and reach their target price.  All nonsense.  Also throw out all company presentations, all nonsense.  Also when you hear people say the company can drill 100% ROR wells, ask them why don't you see all these nonsense ROR's coming out the back end of the company, in the reported financial statements?  Full cycle and full cost accounting have a way of bringing these projections back to reality.

 

Awesome post Kevin, thank you for providing knowledgeable counterpoint. I have a general question in relation to your assertion that tangible asset and book value doesn't matter. This is not the first time I've heard this and every time I've heard it, it is from someone more knowledgable than I, so I am going to assume it is correct but I want to understand why.

 

The only other time I've ever bought a crappy small oil and gas e+p yield product was in 2009 I bought BBEP at 0.3X book because it was at 0.3X book, had lots of hedges, and seth klarman owned it. It was an upstream MLP that slashed its divvy. It was the second stock I ever bought; it was the summer after my sophomore year and I thought i was really smart. I made out on that, but maybe I was lucky or right for the wrong reasons.

 

Now back to my question. Here is my logic. I am an ignorant non-specialist operating with no analytical advantage. How can I hazard a guess as to what PWE may be worth? My first answer would be to start with the balance sheet. See what management paid to buy and develop these assets. the market is pricing these assets at 50 cents on the dollar.

 

I then can ask myself, knowing that former management was terrible and probably overpaid for everything, is that discount big enough? maybe it isn't, maybe it is. While a specialist may know better than I whether those assets are worth 15 cents on the dollar or 85 cents or 150 cents, doesn't the ultimate value of the company have some relation to what was paid for them? Isn't what was most recently paid  (which is balance sheet value) the starting point for analysis of assets?

 

My logic for taking a small (so far) gamble on this is "well shit they can sell some assets for 1/2 of what they paid and pay down debt and this will reprice from distress".

 

Am I just totally clueless?

[Fat Pitch]

I'd hazard a guess that most people here don't know much about oil and gas reserves. Heck I read the book Oil 101 which is the bible on the oil and gas complex and after reading it I realized I don't want to be messing with small O&G companies. While oil itself is fungible, the oil reserves differ materially from one to another.

 

Simply applying a margin of safety on some company's reserves isn't going to cut it. Reserve pressure, how porous the rocks are, water line, etc makes for too many variables. Take a look at the oil trusts, notice how the PV-10 values changed so drastically over a 1-3yr time period even though people were expecting production for 20yrs+ !

[thepupil]

also kevin, just to really illustrate my ignorance here, I'll ask an incredibly dumb question. Do you add the PDP to 1P to get what you would pay? I've seen others do this but I'm not sure that's what you are saying.

 

You are saying the value of the company at $90 oil is:

 

PDP10BT+1P10BT  = $9.52 per canadian share using a discount rate of 10%

PDP15BT +1P15BT = $4.92 per canadian share using a discount rate of 15%

 

You are saying :

a) you require a 15% ROR

b)oil has collapsed so the 15% discount rate value is much lower now

c) the decline in equity value is non-linear because of operating and financial leverage, so it's probably much lower, perhaps to the point of insolvency lower.

 

Am I interpreting what you said correctly? Apologies for all my pesky questions on this thread. Trying to learn.

 

EDIT: I reread your post and realize that you don't add them, so the values are $6.14 and $3.31, not $9.52 and $4.92. Ignorance successfully illustrated.

 

[Hielko]

Now back to my question. Here is my logic. I am an ignorant non-specialist operating with no analytical advantage. How can I hazard a guess as to what PWE may be worth? My first answer would be to start with the balance sheet. See what management paid to buy and develop these assets. the market is pricing these assets at 50 cents on the dollar.

I'm not an expert (not even close) in this field, but I think the major problem is that values can change drastically when oil prices drop. An asset could be worth $100 million at $100 oil, but zero at $80 oil (of course some optionality value remains). You could have massive leverage to the oil price, so looking at past transactions is only useful in a stable environment.

[yadayada]

I think it is a waste of time to try and value the stock here accurately. You will likely be wrong anyway. The way I see it, you buy the 3$ 2017 puts, or the 2.5$ (any opinions?).

 

Then you spread it equally, so let's say 10k$ on the puts (2.5$ 2017), and 10k$ on the common?

 

if they pay out 200m$ over the next 2 years, then you get about 40% your money back from the puts, so you get 4k$ there. And about 1400$ from stock. So 5500$. So then stock either needs to trade 45% higher then now, Or trade lower then 1.5$. So you lose if stock trades between 1.5$-4.5$. Anything above and beyond is profit.

 

I think 200m$ is probably lowballing it here? Assumes a low oil price for 2 years, which seems unlikely.

 

If it is more like 400m$ in dividends over 2 years. You get 8k$ + 3k$ = 11k$. So then you lose if stock trades between about ~2-2.7$ .

 

So given that they paid close to 800m$ in dividends over the last 2 years, how likely is it that their oil wells run dry very soon, or they run out of cash flow? Who cares really where they are 5 years from now. If the stock crashes to zero after paying like 4-500m$ in dividends over the next 2 years, we still win.

 

 

To me the only downside case in this way of playing it, is if they cut dividend very soon, and it turns out a lot of their assets are kind of mediocre, and the price stays roughly at these levels. For that to happen, you need oil prices to stay depressed for about 2 years? Given how the options are priced, it seems the market thinks this is quite likely to happen? Did I make any mistakes in my calculation?

[thepupil]

Now back to my question. Here is my logic. I am an ignorant non-specialist operating with no analytical advantage. How can I hazard a guess as to what PWE may be worth? My first answer would be to start with the balance sheet. See what management paid to buy and develop these assets. the market is pricing these assets at 50 cents on the dollar.

I'm not an expert (not even close) in this field, but I think the major problem is that values can change drastically when oil prices drop. An asset could be worth $100 million at $100 oil, but zero at $80 oil (of course some optionality value remains). You could have massive leverage to the oil price, so looking at past transactions is only useful in a stable environment.

 

agree, but then the bonds are woefully mispriced! (assuming they actually are where bloomberg says they are)

 

if the asset value is so binary, then the bonds should compensate one for that risk and be priced well below par. we've got $8B ish of tangible assets and $2B of debt and a $1.5B market cap. the debt creates the assets at 25 cents on the dollar while the equity is 25-50 cents on the dollar. the bond holders are selling a put on the bottom 25 cents of asset value to clip low coupon with no upside, whereas the equity is short a put spread from 45-25 cents on the dollar, but gets all the upside.

 

once the divvy's cut and the equity collapses further (presuming this happens), then the leverage in the common and potential upside will be even greater, and those bond holders will be in an even more equity like un-cushioned downside risk position with zero upside to boot.

 

I would love to short those bonds or pay on CDS (there is no CDS contract, at least in the US, already looked into it).

[Guest wellmont]

Below is part of an email between Joel S and I.  I asked if it would be worth it to post these ideas and perhaps ignite a firestorm.  Anyways... here goes. 

 

I generally avoid oil and gas unless I am absolutely sure I am buying the low cost producer.  Never ever forget that when you buy oil and gas you are essentially buying the underlying commodity.  I have no way of telling where oil will go today, or tomorrow, so that is why I typically shy away from commodities.  I only buy if I see a huge margin of safety. 

 

I have industry experience, and I understand the business and valuations.  What most people don't understand is how lower oil prices influences so many factors.  It is not just your near term cash flow.  Reserves will be cut, bankers will be worried, asset write downs will occur in Q4, debt covenants may be broken, and bank lines will be curtailed.  Then add in tax loss selling and the oil sector is in for some pain over the next few months. 

 

I'll take a look at the names you mentioned.  I hope you can see from the MEG graph that the relationship between WTI and asset value per share is very non linear.  Many on COBF believe you can just can apply a discount to account for the falling oil prices. 

 

As for Penn West, here are my thoughts.  First, balance sheet and book values are useless in valuing an O&G firm, I see some making that mistake.  I value using the before tax net present value of reserves discounted at 10 or 15% and add any other assets the company has (at cost) and deduct all debts.  For PWT here is the results.  Please keep in mind that the reserve data is stale, they have made two asset divestments this year ($355 million in Q4 and $175 million early this year).  I made some quick and dirty assumptions to account for this, and I corrected the balance sheet.  The reserve report is based on $90 WTI near term pricing and I made no corrections for the drop in oil prices.  You can add your own haircut to the numbers below.

 

All number in Canadian $, PDP = Proven developed producing, 1P = Proven reserves, 10 or 15 = discount rate, BT = Before tax.

 

Current Share price = $3.33/Share

 

PDP10BT - $3.48/share

PDP15BT - $1.61/share

 

1P10BT - $6.14/share

1P15BT - $3.31/share

 

So if oil was still selling for $90 or if you knew it would go back to that level next year, Penn west is a solid investment and meets my hurdle of 15%.  If you believe oil is going to stay at the $70 level, you will need to cut these numbers appropriately, and significantly.  Most of the value in a NPV calculation is the near term cash flows, as you already know. 

 

If these numbers interested me, which they don't, I would then have to look at the CF need to fund the capex and debt obligations.  The reserve report tells you the capital require to convert proven undeveloped reserves (PUDs) into PDP.  As you can see above, quite a bit of the 1P value is PUDs, not PDP. 

 

You're likely over all my rambling but to add further insult to injury, Penn west has the follow capex assumptions baked into their reserve report, see page A3-8.

 

Forecast Prices and Costs

 

Year

Proved Reserves

(MM$)

Proved Plus Probable Reserves (MM$)

 

2014

1P -  704

2P - 840

 

2015

1P - 973

2P - 1,533

 

2016

1P - 419

2P - 726

 

At the end of Q3 they had spent $485 million in capex.  Q4 will have to be curtailed due to the drop in oil prices and reduced CF.  There is no way in China they will be spending a billion dollars to develop their proven reserves, let alone the over $1.5 billion needed for the 2P reserves next year. 

 

And don't get me started on the dividend.  Why do these crony companies pay a dividend when they don't earn a profit?  It is purely to fool private investors who will pay for yield.  To me it is almost a legal Ponzi scheme where they constantly raise more equity to pay off the prior shareholders.  Take Crescent Point, CPG, they have made no money in the past 10 years but have effectively used their over priced equity to raise more of it or use it to buy other companies. 

 

One last word of caution.  Be wary of the NAV numbers touted by analysts.  If you read the fine print it is often based on a huge number of assumptions the analysts have added.  They also then blend it with a CF multiple, which they feel is accurate, and reach their target price.  All nonsense.  Also throw out all company presentations, all nonsense.  Also when you hear people say the company can drill 100% ROR wells, ask them why don't you see all these nonsense ROR's coming out the back end of the company, in the reported financial statements?  Full cycle and full cost accounting have a way of bringing these projections back to reality.

 

doesn't pwt own a lot of land that does not fall into these two categories, which has a lot of potential to have oil and gas on it?

[moustachio]

I think 200m$ is probably lowballing it here? Assumes a low oil price for 2 years, which seems unlikely.

 

I don't think a low oil price for the next two years is very unlikely. US shale oil drillers will cut back activity at low price levels, but if prices start getting higher again they will quickly increase drilling activity. I think this could put a cap on oil prices for years to come. Isn't this why SA decided to not cut? If they cut they give up market share, but at high prices US drillers increase capacity quickly and we are back to low prices or OPEC having to cut production further. No one has a crystal ball, but I wouldn't be surprised if the natural balance leaves us in the 70-80 range. That could easily change with OPEC or OPEC plus non-OPEC production cuts, global political risk, etc. However, in the end I wouldn't make any big investment that requires 80 dollar or higher oil.

[thepupil]

There are hundreds, if not more, oil and gas stocks that have been decimated.  Why is PWE particularly compelling versus some other hard hit securities?  Aside from the fact it has lost almost all of its value.

 

I have never been much of a believer in tax loss selling affecting the share price in a big way.  Maybe it contributes to some of the decline but I don't think you can blame most of it on it.  In fact I would be nervous taking a tax loss in PWE here.  If it is as cheap as everyone thinks, you run the risk of a massive rally in less than 30 days which screws up any tax savings you are trying to achieve.

 

Picasso, there are 38 stocks down 50% or more YTD that fit the following criteria: US+Canada, Oil and Gas (including services), market cap $300MM+.

 

Removing the market cap screen there are 398.  LOL. But I'm not sure how meaningful that is because it's picking up a lot of stuff that would just never be under consideration (namely penny stocks w/ no revenue, assets, or anything)

[kevin4u2]

The reason why book value and tangible book is useless is because historical cost tells you nothing. 

 

If you drill a well for a million dollars and that well will only produce $250k in revenue at strip pricing, it doesn't matter what your historical cost is.  The NPV of the well determines what the value is.  The same can be said of land.  The price you pay for land means nothing, unless you can economically produce something of value. 

 

Awesome post Kevin, thank you for providing knowledgeable counterpoint. I have a general question in relation to your assertion that tangible asset and book value doesn't matter. This is not the first time I've heard this and every time I've heard it, it is from someone more knowledgable than I, so I am going to assume it is correct but I want to understand why.

 

The only other time I've ever bought a crappy small oil and gas e+p yield product was in 2009 I bought BBEP at 0.3X book because it was at 0.3X book, had lots of hedges, and seth klarman owned it. It was an upstream MLP that slashed its divvy. It was the second stock I ever bought; it was the summer after my sophomore year and I thought i was really smart. I made out on that, but maybe I was lucky or right for the wrong reasons.

 

Now back to my question. Here is my logic. I am an ignorant non-specialist operating with no analytical advantage. How can I hazard a guess as to what PWE may be worth? My first answer would be to start with the balance sheet. See what management paid to buy and develop these assets. the market is pricing these assets at 50 cents on the dollar.

 

I then can ask myself, knowing that former management was terrible and probably overpaid for everything, is that discount big enough? maybe it isn't, maybe it is. While a specialist may know better than I whether those assets are worth 15 cents on the dollar or 85 cents or 150 cents, doesn't the ultimate value of the company have some relation to what was paid for them? Isn't what was most recently paid  (which is balance sheet value) the starting point for analysis of assets?

 

My logic for taking a small (so far) gamble on this is "well shit they can sell some assets for 1/2 of what they paid and pay down debt and this will reprice from distress".

 

Am I just totally clueless?

[kevin4u2]

Your exactly right.  It isn't linear down to $0 WTI.  Costs have to be paid from revenue.  At some point the result is ZERO.

 

Now back to my question. Here is my logic. I am an ignorant non-specialist operating with no analytical advantage. How can I hazard a guess as to what PWE may be worth? My first answer would be to start with the balance sheet. See what management paid to buy and develop these assets. the market is pricing these assets at 50 cents on the dollar.

I'm not an expert (not even close) in this field, but I think the major problem is that values can change drastically when oil prices drop. An asset could be worth $100 million at $100 oil, but zero at $80 oil (of course some optionality value remains). You could have massive leverage to the oil price, so looking at past transactions is only useful in a stable environment.

[SharperDingaan]

Re O&G Valuation: Investors have to recognize that these things value in a non-linear fashion, not the linear valuation approach of just about all securities valuation methodology. There are two main approaches; use options in a straddle to exploit the volatility, or let supply/demand force the price down to either BK or something stable.

 

PWE is just one of many o/g firms. There is little harm in waiting a few months to see what happens to them. If todays price drops 40%, your same $ investment will get you 2/3 more shares. If they actually go under, you will have saved yourself a world of pain. Our preference is shares over options, but we're not afraid to use them, & O/G is in our circle of competency.

 

SD

[ERICOPOLY]

Like you say, oil could stay down and this is a zero.  I got interested in the sector after reading the recent interview of a man who has seen a lot of these cycles -- T. Boone Pickens.  Explains that $100 oil in 12 months wouldn't surprise him.

 

I wanted an option that doesn't expire except upon bankruptcy, instead of putting a relatively larger amount into a safer name like XOM. 

 

PWE is kind of like that option.

 

Frees up liquidity this way.

 

I've already lost 1/3 of this money anyhow -- it is earmarked for paying BAC dividend taxes.  So only $2 per PWE share is really mine to keep.

[thepupil]

Amen Eric, I think my takeaway from this discussion is that  Exxon is wife and PWE is a total prostitute. I went in thinking that but after reading kevin's and others commentary, I think she's even filthier than I first imagined. 

 

Appreciate all the input guys.

[Picasso]

Amen Eric, I think my takeaway from this discussion is that  Exxon is wife and PWE is a total prostitute. I went in thinking that but after reading kevin's and others commentary, I think she's even filthier than I first imagined. 

 

Appreciate all the input guys.

 

In other words, PWE is [insert your favorite board member]'s mother.

[goldfinger]

Like you say, oil could stay down and this is a zero.  I got interested in the sector after reading the recent interview of a man who has seen a lot of these cycles -- T. Boone Pickens.  Explains that $100 oil in 12 months wouldn't surprise him.

 

The other one is Hamm who put his money where his mouth is and has removed all edges. He is one of the fathers of the current shale oil "revolution" and he recently explained his move a bit better: basically OPEC (including saudis) are all talks (their reserves are probably super inflated and their total prod has peaked a while ago..., along with the rest of conventional world production), oil prices will have to come back within next year...

[investor-man]

Like you say, oil could stay down and this is a zero.  I got interested in the sector after reading the recent interview of a man who has seen a lot of these cycles -- T. Boone Pickens.  Explains that $100 oil in 12 months wouldn't surprise him.

 

The other one is Hamm who put his money where his mouth is and has removed all edges. He is one of the fathers of the current shale oil "revolution" and he recently explained his move a bit better: basically OPEC (including saudis) are all talks (their reserves are probably super inflated and their total prod has peaked a while ago..., along with the rest of conventional world production), oil prices will have to come back within next year...

 

Would you guys mind posting links to the interviews you read? TIA

[ItsAValueTrap]

I agree with Kevin... the sane way of valuing these assets is by doing your homework and trying to figure out their Net Present Value.

 

Unfortunately, these companies can easily fudge their own NPV calculations.  Go read the ATPG thread... LOL.  Their PV-10 values were not reliable to say the least.  Now the company's symbol is ATPAQ.

 

Personally, I'd be extremely skeptical about black boxes.

[thepupil]

I agree with Kevin... the sane way of valuing these assets is by doing your homework and trying to figure out their Net Present Value.

 

Just curious, have you ever used said sane way of valuing assets and identified a long opportunity? I've never really seen you mention a resource company as a long and you appear to be quite knowledgeable and have read your mining textbooks and know a lot about lots of companies.

 

The correct answer may be there are none because you don't go looking for a wife in a whorehouse (to continue my misguided analogy) and that's kind of been my view given I've only ever bought 2 (3 if you count BP)

 

But let's say someone was very bullish on oil or copper or whatever and hired you to buy five stocks to express their view. Which would you buy? Thanks.

[ERICOPOLY]

This is just like the old days on the BAC thread....

 

Yesterday, I thought about adding that we still needed some posts about:

1) I'm waiting for the next 30% decline before the bottom

2) It's a black box, how can you value it?

 

Well... deja vu. However, I felt better about BAC. And points 1&2 above are perhaps valid this time (in the case of BAC it was years after the crisis and books had been scrubbed)