SD - SandRidge Energy

[ourkid8]

I am not sure I understand what is not clear. They released 2014 guidance which is actually superb and now they need to execute against the plan.  Why do you not trust the new management team who has exceeded on everything they have said to date? I just cannot comprehend...

 

Tks,

S

 

"Same goes with SD. The impression I get is that the general attitude is, "TPG and Cooperman say it's worth X, so now we can just focus on results that fit that conclusion"."

 

Why would I put more weight behind some anonymous poster that has discussed with some geologists of unknown competencies vs three fund managers with great reputations backed by a team of solid analysts and whom have all invested a significant sum in said company?

 

Which one has more analytical value?

 

Cardboard

 

I agree with you.  Caveat emptor . . . but I will note that Cooperman's E&P guy put them into GMXR when it was a blatant fraud that anyone who understood the business could see.  This went to zero, then he put them into LINE which was overvalued based on a tax arbitrage and had obvious accounting issues with their disengenous hedging program.  Fairfax doesn't have a great track record in energy either.

 

I have the utmost respect for these investors and in no way am I saying I am better, know more, or even know what I'm talking about. 

 

What I am saying is "I don't get it" . . . and until those great investors, their analysts, or someone on this board convinces me otherwise, I won't invest.

 

That's an excellent point about GMXR, which I owned for a while, sold - and then saw it implode. Have lots of respect for Cooperman, but

Tom Ward fooled a lot of people up to now. SD is a tough one to figure out. With the activists involved, you would have thought it would

be in the clear - as they have control and execute on their plan.

[cubsfan]

I am not sure I understand what is not clear. They released 2014 guidance which is actually superb and now they need to execute against the plan.  Why do you not trust the new management team who has exceeded on everything they have said to date? I just cannot comprehend...

 

Tks,

S

 

"Same goes with SD. The impression I get is that the general attitude is, "TPG and Cooperman say it's worth X, so now we can just focus on results that fit that conclusion"."

 

Why would I put more weight behind some anonymous poster that has discussed with some geologists of unknown competencies vs three fund managers with great reputations backed by a team of solid analysts and whom have all invested a significant sum in said company?

 

Which one has more analytical value?

 

Cardboard

 

I agree with you.  Caveat emptor . . . but I will note that Cooperman's E&P guy put them into GMXR when it was a blatant fraud that anyone who understood the business could see.  This went to zero, then he put them into LINE which was overvalued based on a tax arbitrage and had obvious accounting issues with their disengenous hedging program.  Fairfax doesn't have a great track record in energy either.

 

I have the utmost respect for these investors and in no way am I saying I am better, know more, or even know what I'm talking about. 

 

What I am saying is "I don't get it" . . . and until those great investors, their analysts, or someone on this board convinces me otherwise, I won't invest.

 

That's an excellent point about GMXR, which I owned for a while, sold - and then saw it implode. Have lots of respect for Cooperman, but

Tom Ward fooled a lot of people up to now. SD is a tough one to figure out. With the activists involved, you would have thought it would

be in the clear - as they have control and execute on their plan.

 

I am not being critical of the new management team at all - I'm glad they booted Ward - and the change is a good one.

I trust them more than Ward, that's for sure.

 

I've been long SD for a while - and hope they can execute on the plan.

 

But if I had to do it over again - I'd put it in the "too hard" pile - after believing too much of Ward's promises.

 

I just think T-Bone's point is a good one - this E&P area is not easy at all.

[alertmeipp]

I will continue to repeat - DVN trades at 3.4x ebitda. There is no debate which is the better buy, unless of course sd is about to get taken out at a premium multiple for a piss poor operator. Not gunna happen.

 

What if you look at EV/EBITDA or EV/Revenue.

[cemadh]

I used to own SD and then got out of it completely when the released results for the 30-day IPs in the ML looked lackluster. I got very lucky on the timing of my exit. But I would like to add that NG prices are the big wild card in the SD equation. One or more LNG export plants could come online in 2015 (certainly in 2016). Many LNG and CNG based cars are trucks are being introduced. CLNE is building out a network of NG fueling stations. There are other incremental NG demand drivers such as new electricity generation and fertilizer manufacturing coming to the US on top of the existing home heating and electricity generation.

All this is to say that if NG goes to $5.5 MCF then all of a sudden, the Century plant deal with OXY becomes a money spinner instead of a money loser and all/most of  the wells in the SD network become much more profitable.

 

Difficult to say when NG will get to $5.5 but it is simply a matter of WHEN - not IF. If SD can keep drilling "decent" wells for a year or 18 months, then NG will take the stock to $10 even if TPG is unable to sell the company.

 

I actually think that SD will get many offers as soon as NG starts climbing - it does not have to reach $5.5 for SD to get buyout offers.

[phil_Buffett]

I used to own SD and then got out of it completely when the released results for the 30-day IPs in the ML looked lackluster. I got very lucky on the timing of my exit. But I would like to add that NG prices are the big wild card in the SD equation. One or more LNG export plants could come online in 2015 (certainly in 2016). Many LNG and CNG based cars are trucks are being introduced. CLNE is building out a network of NG fueling stations. There are other incremental NG demand drivers such as new electricity generation and fertilizer manufacturing coming to the US on top of the existing home heating and electricity generation.

All this is to say that if NG goes to $5.5 MCF then all of a sudden, the Century plant deal with OXY becomes a money spinner instead of a money loser and all/most of  the wells in the SD network become much more profitable.

 

Difficult to say when NG will get to $5.5 but it is simply a matter of WHEN - not IF. If SD can keep drilling "decent" wells for a year or 18 months, then NG will take the stock to $10 even if TPG is unable to sell the company.

 

I actually think that SD will get many offers as soon as NG starts climbing - it does not have to reach $5.5 for SD to get buyout offers.

 

cemadh you are right. the question is really when will Natgas going higher. this is the 1million Dollar question.

 

@t-bone1

 

t-bone do you have a opinion about exco? would be interesting to hear  ;)

 

I think people are likely to make money at these prices and I assume Doug Martin bids for the company next year with the backing of FFH and Ross . . .

 

. . . but I have never understood value investor's fascination with this company.  It's never been cheap (until now), it's never been good, it's never been conservative . . .XCO is basically a smaller, sh***er, more expensive version of CHK.  Whatever all these value guys see in XCO, I've never seen it and I don't get it.

 

Disclosure - I own some in-the-money leaps on it now, because I do think it gets taken out and is finally cheap-ish.

 

thank you t-bone for your Response.  do you mean Doug miller the last ceo? or who is Doug Martin?

 

thanks again  :)

[T-bone1]

Phil_Buffett,

 

Yes, I meant Doug Miller.  Sorry for the confusion.  Doug Martin was on my fantasy football team this year and despite a season ending injury is unlikely to be preparing a bid for any oil or gas assets.

 

Best,

t-bone1

[alertmeipp]

The market just doesn't like commodity in general even for those that are generating robust cash flow. Let alone company loke sandridge.

[zippy1]

Phil_Buffett,

 

Yes, I meant Doug Miller.  Sorry for the confusion.  Doug Martin was on my fantasy football team this year and despite a season ending injury is unlikely to be preparing a bid for any oil or gas assets.

 

Best,

t-bone1

 

;D

[SouthernYankee]

"Yes, I meant Doug Miller.  Sorry for the confusion.  Doug Martin was on my fantasy football team this year"

 

-Definitely understand how Doug Martin could get you confused.  :(  You probably have been muttering his name in your sleep for the past 2 months!

[phil_Buffett]

whats wrong with this stock? gas Price rising. sd falling every day. more and more. it is brutal  >:(

[bmichaud]

Investors are swapping from SD to DVN  8)

[CorpRaider]

I'm bout to get long again, FWIW.

[alertmeipp]

whats wrong with this stock? gas Price rising. sd falling every day. more and more. it is brutal  >:(

 

Not sure why, but definitely some selling pressure, maybe TW or even FFH. But I know if NG runs to 5 bucks, IRR will be 60%. (I doubt it will stay there even if it really gets there) And year end NAV should be quite a bit higher than last year.

 

 

Historically, buying in 5s and selling in high 6s has been a good strategy.

 

 

 

[Cardboard]

I may have ruffled some feathers with my latest comment on this thread however, I think it was appropriate considering some of the comments used by some posters: "full of shit", "shitty company", etc.

 

One thing I have not mentioned is why would people bash the new management team of this company while they seem to have done everything right since they have been placed in power? Have they been dishonest in any kind of way that would warrant such cynical views? If they say that there is a possibility for a stacked play, then why would I dismiss that out of hand?

 

Buying SandRidge is about the benefits that will result from the cleanup effort that is going on: cutting costs, focus on capital efficiency, eventually reducing debt and from the inherent leverage on the share price from the current capital structure.

 

If they get bought out, it is pretty evident that a good share price can be negotiated without changing too much the EV/EBITDA ratio for a buyer. Not so for a Devon. If they don't get bought out and keep improving operations then there is more accrual on a per share basis than for a firm with little debt. Now, if you believe that the Mississippian play is garbage then move on. Personally, I see no evidence of that so far and if they just focus on the best portion of it which is by the way enormous in terms of acreage for a company of their size then they should have plenty of oily drilling locations for a very long time.

 

Cardboard

[bmichaud]

If they don't get bought out and keep improving operations then there is more accrual on a per share basis than for a firm with little debt.

 

By definition that's what happens when leverage is involved.

 

Let's compare the DVN v. SD with a simplistic hypothetical:

 

- Two firms with idential $1,000 EBITDA, and the fair value EV/EBITDA multiple is 6X for simplicity.

- Firm A has 1 turn of net debt, and trades at 3.5X. Current equity value is 2,500. 

- Firm B has 3 turns of net debt, and trades at 5.5X. Current equity value is 2,500.

 

- Firm A equity fair value is 5,000 - upside from current 2,500 equity value is 100%.

- Firm B equity fair value is 3,000 - upside from current 2,500 equity value is 20%.

 

 

Were both firms trading at the same 5.5X multiple, then upside would be 20% for Firm B versus 11.1% for Firm A.

 

DVN has less debt, greater diversity and a higher production growth profile. I would strongly argue that it should trade at a pretty steep premium to SD, which over the long run would negate any "advantage" SD may have with a higher debt load.

[T-bone1]

I may have ruffled some feathers with my latest comment on this thread however, I think it was appropriate considering some of the comments used by some posters: "full of shit", "shitty company", etc.

 

One thing I have not mentioned is why would people bash the new management team of this company while they seem to have done everything right since they have been placed in power? Have they been dishonest in any kind of way that would warrant such cynical views? If they say that there is a possibility for a stacked play, then why would I dismiss that out of hand?

 

Buying SandRidge is about the benefits that will result from the cleanup effort that is going on: cutting costs, focus on capital efficiency, eventually reducing debt and from the inherent leverage on the share price from the current capital structure.

 

If they get bought out, it is pretty evident that a good share price can be negotiated without changing too much the EV/EBITDA ratio for a buyer. Not so for a Devon. If they don't get bought out and keep improving operations then there is more accrual on a per share basis than for a firm with little debt. Now, if you believe that the Mississippian play is garbage then move on. Personally, I see no evidence of that so far and if they just focus on the best portion of it which is by the way enormous in terms of acreage for a company of their size then they should have plenty of oily drilling locations for a very long time.

 

Cardboard

 

No feathers ruffled here Cardboard and I apologize if I went a little overboard on my dislike of the Miss Lime and previous management.

 

The point I was trying to get across with my strong language is that I don't believe this "play" is as economic as the company would have you believe.  I am not trying to bash new management or make any judgement about them - but I will bash the "play" because I don't think it is one (in the sense that a "resource play" is repeatable)

 

If you told me I could invest $40 million dollars for a 100% interest in Sandridge's next ten wells or that I could instead invest $40 million dollars in the stock market or corporate bonds, I wouldn't even consider investing in their wells.

 

I realize this sounds like I am calling them liars, but really I am trying to say "I don't get it".  If you study the Sandridge Mississippian Trusts, where you can get a window into their operations, these wells consistently don't live up to expectations.  The obvious explanation would be that these wells are in different areas, but I have compared them on a section by section basis, and they are in what Sandridge says are the very best areas.  The results from these wells are definitely not living up to the type curve and they never have in any quarter I've looked at.

 

I spoke to the COO of a mineral company who sold their land in the Miss Lime to Sandridge rather than lease it to Sandridge and accept a big royalty.  At the time I didn't understand why they would do that, but he explained that he couldn't understand how Sandridge was making money based on state production data (rather than the self reported type-curve).  He didn't call them liars, but he basically said he didn't get it. 

 

I am not making any judgement about new management.  And I have absolutely nothing but respect for Prem and everyone at Fairfax . . . I assume Sandridge is on the up and up and that I am misunderstanding something.  It is disconcerting that other operators in the area can't seem to figure it out and no one can seem to explain it to me, but I still assume the company is trading for a bargain price.

 

Many friends of mine and people I respect own SD and I hope they do very well with it.  Like I said, I would rather buy it than short it here if you made me do one or the other.

 

I do have plenty of vitriol for former management because I believe they lied to me (when I was a shareholder) and lied to all of you.  I won't rehash why I believe that is the case.

 

The short answer is that I wouldn't invest in a Sandridge well in the Miss Lime because all of the evidence suggests they aren't working.

 

If someone did an analysis that showed how many wells they have drilled and how many barrels of oil they have sold and the total amount they have spent and shown that this produces anything close to the IRR the company claims, I'll jump in with both feet.  In the meantime, I'll be on the sidelines, but I remain an active sideline participant as long as friends and fellow board members seem to be taking the word of this company as gospel when I cannot see evidence to back it up.

 

 

[T-bone1]

Since I am being long-winded and saying that more data is needed, I've attached a map I made, superimposing the SDR (Sandridge Miss Trust II) acreage over the locations off all of the wells that Sandridge says outperformed the type curve (at the time of making this).

 

I'll have to try to dig up my model, but I made a model of for the amount of production SDR gets every quarter from the reported number of wells drilled for the trust in each quarter (net to their interest).  In order to make this model fit reality, you need to assume that every single well in the SDR trust performs at less than half the type curve! 

 

If Sandridge has chosen to drill wells for SDR on the schedule they set out in the prospectus, the distributions would be roughly half of what is claimed in the prospectus.  Instead they drilled nearly twice as many wells per quarter (you can make your own assumptions about why they would do this) so that they nearly matched the "projected distribution".  Two crappy wells equal roughly the amount of one decent well, but it doesn't mean the IRR is decent.

 

This is reflected in the fact that they were forced to write down their reserves by half (for the trust).  Maybe they've just gotten unlucky 100 times in a row . . . but I'm not buying it. 

 

Sandridge hasn't been forced to write-down their reserves because they don't have very much reserves (they put a lot into the trusts early on).  They are adding enough new reserves (whether at a positive ROIC or not) each year to cover any shortfall in production from previous wells vs. what was projected in the type curve.

 

I really am not sure what is going on here, but I have one thought.  In shale, you get gas or oil directly from the rock face you access via fracturing, and then you also get a slow long-lived source of production from the rock matrix, from which oil and gas slowly seep out into the area you've fractured.  This is why shale has a hyperbolic decline - you are combining a high-pressure high-decline source of free oil and gas with a low decline long lived (but lower production) source of migrating oil and gas.  This migration is how oil and gas get out of the shale in the first place and into formations like the Miss Lime.

 

Sandridge's wells have nothing like this (in terms of a theory or mechanism for why they should have a hyperbolic decline).  They are as likely to fill with water, lose pressure, or any number of other problems you get when you are wildcatting.  I assume this is what's happening (I think it's more likely that the problem is with the performance of existing wells - not that they are lying about IP figures of new wells).

 

Sandridge's "statistical decline curve" is based on historical production of successful vertical wildcat wells into the Miss Lime.  When one of these struck oil, they would drill more around it, so it is no surprise that 80% of them were successful . . . probably 75% were drilled in the vicinity of the 1/5 that were initially successful.  These wells had long tails as they slowly drained the localized reservoirs of oil that they had encountered. 

 

Sandridge is saying their fracked horizontals (which are getting longer and longer last time I checked to cover over poor performance) will have a similar long tail, but this doesn't seem to be the case.  It doesn't really make sense that they would either.

 

I really wish the best for new management and the current shareholders, so I will stop ranting, but I would like people to know that the "science" behind Sandridge's type curve (which new management has inherited) seems to be dubious and somewhat disingenuous.  I wouldn't be surprised if Sandridge maintains their type curve because they can say each of these wells is a unique case of water intrusion, etc (while also adding costs like pumps and longer laterals to try to get better production), but as far as I can tell, they can't maintain their production from these wells.

 

I AM NOT saying this company is a short or worth less than $5 dollars.  If the wells performed at the type curve it would probably be worth $20 per share.  As it is, I have no idea . . .

[plato1976]

As a SD shareholder, I learned a lot from your post. Thank you so much, T-bone !

Pls keep posting your analysis - many enjoy your posts I bet.

 

 

Since I am being long-winded and saying that more data is needed, I've attached a map I made, superimposing the SDR (Sandridge Miss Trust II) acreage over the locations off all of the wells that Sandridge says outperformed the type curve (at the time of making this).

 

I'll have to try to dig up my model, but I made a model of for the amount of production SDR gets every quarter from the reported number of wells drilled for the trust in each quarter (net to their interest).  In order to make this model fit reality, you need to assume that every single well in the SDR trust performs at less than half the type curve! 

 

If Sandridge has chosen to drill wells for SDR on the schedule they set out in the prospectus, the distributions would be roughly half of what is claimed in the prospectus.  Instead they drilled nearly twice as many wells per quarter (you can make your own assumptions about why they would do this) so that they nearly matched the "projected distribution".  Two crappy wells equal roughly the amount of one decent well, but it doesn't mean the IRR is decent.

 

This is reflected in the fact that they were forced to write down their reserves by half (for the trust).  Maybe they've just gotten unlucky 100 times in a row . . . but I'm not buying it. 

 

Sandridge hasn't been forced to write-down their reserves because they don't have very much reserves (they put a lot into the trusts early on).  They are adding enough new reserves (whether at a positive ROIC or not) each year to cover any shortfall in production from previous wells vs. what was projected in the type curve.

 

I really am not sure what is going on here, but I have one thought.  In shale, you get gas or oil directly from the rock face you access via fracturing, and then you also get a slow long-lived source of production from the rock matrix, from which oil and gas slowly seep out into the area you've fractured.  This is why shale has a hyperbolic decline - you are combining a high-pressure high-decline source of free oil and gas with a low decline long lived (but lower production) source of migrating oil and gas.  This migration is how oil and gas get out of the shale in the first place and into formations like the Miss Lime.

 

Sandridge's wells have nothing like this (in terms of a theory or mechanism for why they should have a hyperbolic decline).  They are as likely to fill with water, lose pressure, or any number of other problems you get when you are wildcatting.  I assume this is what's happening (I think it's more likely that the problem is with the performance of existing wells - not that they are lying about IP figures of new wells).

 

Sandridge's "statistical decline curve" is based on historical production of successful vertical wildcat wells into the Miss Lime.  When one of these struck oil, they would drill more around it, so it is no surprise that 80% of them were successful . . . probably 75% were drilled in the vicinity of the 1/f that were initially successful.  These wells had long tails as they slowly drained the localized reservoirs of oil that they had encountered. 

 

Sandridge is saying their fracked horizontals (which are getting longer and longer last time I checked to cover over poor performance) will have a similar long tail, but this doesn't seem to be the case.  It doesn't really make sense that they would either.

 

I really wish the best for new management and the current shareholders, so I will stop ranting, but I would like people to know that the "science" behind Sandridge's type curve (which new management has inherited) seems to be dubious and somewhat disingenuous.  I wouldn't be surprised if Sandridge maintains their type curve because they can say each of these wells is a unique case of water intrusion, etc (while also adding costs like pumps and longer laterals to try to get better production), but as far as I can tell, they can't maintain their production from these wells.

 

I AM NOT saying this company is a short or worth less than $5 dollars.  If the wells performed at the type curve it would probably be worth $20 per share.  As it is, I have no idea . . .

[oldye]

On average the wells drilled this year are performing well above the revised type curve thanks in part to EOR.

 

As far as the trusts go, everyone knows production will fall off a cliff once they stop drilling in the Miss, aside from owning them indirectly through SD, I wouldn't touch them. 

[Zorrofan]

T-bone,

 

thank you for your comments. i often find your posts quite informative.  You clearly have put a lot of thought into the Miss-play. Any thoughts on the comments management made on the last conference call concerning the potential play in the GOM?

 

"On the subsalt prospect, this is a prospect that has a very high level of interest from the industry. We have been asked about this prospect two or three times this year alone and what we are trying to do is select a partner that has that expertise of drilling subsalt and so we have started those conversations, but it's still probably too early to share data beyond that. Again, we are very excited. We think we have two of the best exploration prospects in the Gulf right now between the deep Miocene underneath the Bullwinkle and the subsalt at South Pass. They are two potentially very lucrative prospects, so we are encouraged and we are starting conversations to select a JV partner that we think has the premium skill set to efficiently develop these with us.

Adam Duarte - Omega

Do you have estimates for the prospects?

David Lawler - Chief Operating Officer, Executive Vice President

Shell had estimated that Bullwinkle was somewhere around 200 million barrels of oil. Again that's just a Shell estimate and we don't have a number on South Pass 60 yet."

 

cheers

Zorro

[alertmeipp]

I guess it comes down to whether you trust the management or not. The management states that this play is not economical unless they have the scales. They actually colored this as a competitive advantage which allows them to acquire core locations cheaply.

 

 

[T-bone1]

T-bone,

 

thank you for your comments. i often find your posts quite informative.  You clearly have put a lot of thought into the Miss-play. Any thoughts on the comments management made on the last conference call concerning the potential play in the GOM?

 

"On the subsalt prospect, this is a prospect that has a very high level of interest from the industry. We have been asked about this prospect two or three times this year alone and what we are trying to do is select a partner that has that expertise of drilling subsalt and so we have started those conversations, but it's still probably too early to share data beyond that. Again, we are very excited. We think we have two of the best exploration prospects in the Gulf right now between the deep Miocene underneath the Bullwinkle and the subsalt at South Pass. They are two potentially very lucrative prospects, so we are encouraged and we are starting conversations to select a JV partner that we think has the premium skill set to efficiently develop these with us.

Adam Duarte - Omega

Do you have estimates for the prospects?

David Lawler - Chief Operating Officer, Executive Vice President

Shell had estimated that Bullwinkle was somewhere around 200 million barrels of oil. Again that's just a Shell estimate and we don't have a number on South Pass 60 yet."

 

cheers

Zorro

 

I really don't know much about offshore drilling and I definitely don't know anything about subsalt exploration.

 

As a general rule for the oil and gas business, I am very afraid of thesis creep - Which I have been the victim of myself in the past. 

 

If a company pays more than anyone else is willing to pay for something, and it isn't spending hundreds of millions of dollars on serious scientific exploration work, my default is to assume they are full of it (or their initial thesis didn't work) when they claim to have more upside. 

 

The subsalt and stacked play in the Miss could very well work out, but I don't think FFH, TPG, or Tom Ward thought this was part of the investing thesis when they bought these assets/company.

 

I read a long time ago that there are three ways to make money in the oil and gas business:

 

1) Be first

 

2) Be an aggregator

 

3) Have the price of the commodity go up

 

I have never made money on a company that used strategy number 4: try something else and see what else we have.

[rogermunibond]

 

I read a long time ago that there are three ways to make money in the oil and gas business:

 

1) Be first

 

2) Be an aggregator

 

3) Have the price of the commodity go up

 

I have never made money on a company that used strategy number 4: try something else and see what else we have.

 

In the case of some of the best plays in NA (Marcellus, Eagleford, and Permian Midland), be first means you bought the properties when they were vertical producers from big oil and have held onto them for years.

 

Cabot did this in the Marcellus (though they added to their positions in 2008).  Range did this in the Marcellus too.  PXD (then Parker and Parsley) in the Permian Midland has owned these properties since they were sold by Exxon and Texaco in the 80s and 90s.

 

In some cases be first morphs from strategy 4.  They were just sitting on these assets for years.

[T-bone1]

 

I read a long time ago that there are three ways to make money in the oil and gas business:

 

1) Be first

 

2) Be an aggregator

 

3) Have the price of the commodity go up

 

I have never made money on a company that used strategy number 4: try something else and see what else we have.

 

In the case of some of the best plays in NA (Marcellus, Eagleford, and Permian Midland), be first means you bought the properties when they were vertical producers from big oil and have held onto them for years.

 

Cabot did this in the Marcellus (though they added to their positions in 2008).  Range did this in the Marcellus too.  PXD (then Parker and Parsley) in the Permian Midland has owned these properties since they were sold by Exxon and Texaco in the 80s and 90s.

 

In some cases be first morphs from strategy 4.  They were just sitting on these assets for years.

 

I agree Roger, no one said you have to be smart to be first!  A lot of people who were first to a play were lucky and the old saw that the best place to find more oil is where you have already found oil certainly holds true. 

 

PXD is the best example of this.  In the Marcellus and Eagle Ford, much of the good shale is actually outside of historic production areas because the oil and gas migrated laterally to the conventional deposits that were held by production.  Either way, I would never invest in a company that is hoping there might be more oil or gas in some different formation on their property. 

 

With every discovery of a new resource, especially shale, someone had to spend hundreds of millions to discover how to extract the oil or gas profitably, at which point both they and neighboring companies benefited.  This certainly works a lot better if - like PXD - your land is already held by production.

 

In any case, I would happily invest in any company (with decent management) trading at a large discount to the value of the resource they own.  I would not invest in a company trading for a large discount to the hypothetical resource they might have (the old MMR comes to mind), unless they were at a huge discount and had the cash to succeed without diluting me tremendously. 

 

With all the risks in oil and gas exploration, I don't think it makes sense to pay for upside.  This is why most people traditionally wouldn't pay more than PV10.  Now that PV10 is meaningless for shale companies and interest rates are a lot lower, the whole industry is a bit of a mess valuation wise.  I think you can approximate PV10 for known, delineated resources with a known development plan (essentially what PV10 was originally for conventional deposits), but you can't put a number on upside.

 

Best,

 

T-bone1

[investor-man]

SD declares a preferred dividend http://phx.corporate-ir.net/phoenix.zhtml?c=196066&p=irol-newsArticle&ID=1884044&highlight=