Fertiliser companies are very out of favour at the moment. A major Russian producer has recently turned its back on a cartel and the stocks of fertiliser companies have quite rightly been thrashed as a result. This means that value investors and contrarians will be looking for any mis-pricing.
This is the final instalment of my How to value an oil company series, and it is a real life example of a valuation. Novus energy is a small oil company trading at a large discount to its fair value.
The oil industry uses several standard metrics to value and evaluate oil producing companies. In this article I explain what they are, their strengths and weaknesses and how to use them.
The next stage of an oil company is production. The process is fairly simple in theory but it is important to understand otherwise you could end up overpaying for an asset with quickly diminishing returns.
In Part 1 I looked at oil prices briefly, concluding that while important it is unknowable and therefore, as Warren Buffett advises, don’t spend all your time worrying about it. Instead lets worry about what we can know and that’s oil exploration.
This series of articles looks at how to value an oil company, from looking at the price of oil to oil exploration and production. By highlighting the key metrics used in evaluation you will have all the tools needed to value an oil company.
Stocks have been moving down recently, and none more so than Oil & Gas companies. Lots of names in the industry are trading at just half their 52 week highs. The reason often given in the news is forecast lower global demand for oil which is being interpreted as bearish for stocks in general. However it has, in mine and others opinion, more to do with the big increase in supply and production from North America predicted in the future. The USA is on track to become the largest producer of oil in the world.
Legacy Oil is a low cost North American producer that can remain profitable at low oil prices and has large upside if oil prices are high in the future.
In my last article on the ‘Best Investment for you’ I considered John Paulson’s advice for investors to buy a home. I focused a lot on how to value a house using rental yield to get an idea of whether or not you are overpaying for an asset. What I didn’t do was consider whether John Paulson’s advice was sensible or not and a lot of the discussion in the comments focused on house buying vs renting. So I’m going to rewind and address that question. The easiest way of doing this is to crunch the numbers – lucky for you I’ve tried to do as much of the hard work as possible and here is a model of buying vs renting costs with customizable inputs.
Terra Energy (TSE:TT) is a natural gas producer trading below its PV10 – the discounted future expected cash flows from flowing gas reserves, after expenses – a great way to profit from increases to the price of natural gas then. I test the assumptions underlying the PV10 calculation to assess the downside.
Ithaca Energy is a stock I looked at quite a while ago. I wrote the following article and was about to buy shares, but in an extreme case of bad luck, just before I could initiate a position the shares rallied 30%. I haven’t since initiated a position but think the shares are still compelling so thought I would post the write up. They have just reported Q3 2013 results which showed record cash flow, putting them at a EV / Annualised Cash flow multiple of just 3.5.