Quickly estimating the DCF of oil and gas reserves

From what I can tell, practically all stocks’ oil and gas reserves will have a Net Present Value of roughly 2-7 times the trailing twelve months’ cash flow.  One relevant article is titled: “The Valuation of Oil and Gas Properties: Are They Really Worth 3x Cash Flow?“.  For conventional wells, the 3X rule of thumb should come fairly close to the NPV in most cases.

I use this shortcut to get a quick sense of whether or not an E&P is massively overvalued.  Currently I only short E&Ps and am not seeing any undervalued E&Ps even though these stocks have fallen a lot.

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The shortcut method for figuring out a company’s accounting

Here’s what I do… I look at how the company handles depreciation and amortization of its assets.  If management is trying to inflate earnings, it is highly likely that management will be aggressive in making aggressive estimated useful life assumptions behind D&A.

  1. It’s really obvious to the accountants that they can inflate earnings by making more aggressive assumptions here.
  2. Pulling this lever is perfectly legal since these assumptions are inherently uncertain and therefore subjective.  No one will go to jail for pulling on this lever.
  3. All companies have to make assumptions on this accounting topic.

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Chart reading… the crazy short selling way (plus other silly tricks)

Here are some shortcuts that I use to quickly figure out a stock.

  1. Mysterious price spikes on high volume and little/no news.  Sometimes, these coincide with stock promotion like an email blast, physical mailers arriving, etc. etc.  A stock that has many of these spikes is probably an egregious pump and dump.
  2. The stock IPOed during the Dot-Com era and has been on a slow decline since.  Usually these Dot-Bomb wreckages are a decent place to look for shorts.  A lot of questionable stuff went public during the Dot-Com boom.  Such stocks have a tendency to stay somewhat questionable.  Pedigree matters.
  3. The share price performance since inception isn’t very good.  Usually a sign of a bad or mediocre underlying business.

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Hollysys: these guys are really good at putting up phenomenal numbers

(*Disclosure: I am short.)

Hollysys is a Chinese company that designs high-tech stuff.  Interestingly enough, they were able to grow revenues, profits, and operating cash flow without having to increase capex.  See the chart on the left from page 31 from the latest investor presentation:

investor-presentation-page-31

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CONN 10-K update

Key points in CONN’s latest 10-K

  1. Omitted the static loss table found in previous 10-Ks and 10-Qs.
  2. Removed the following sentence: “Under our current policy, the maximum number of months an account can be re-aged over the life of the account is limited to 12 months.”

I guess I will continue to hold my short position in CONN.  While I don’t entirely know what’s going on, this does not smell right.  (*The borrow is expensive.)

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CWC merger / John Malone liked LiLaC more than Global

I tried to figure out what the CWC merger structure was about.  You can access my spreadsheet here: https://docs.google.com/spreadsheets/d/1c_31Z-eoxXAPc1TfeOMjgdirZu-nk54DHwGKXSlOao8/edit?usp=sharing

Summary:

  • The way the merger is structured is that the Recommended Offer gives you the most value from a merger arbitrage perspective.  However, you will get a very low mix of LiLaC shares.  What Malone is doing here is luring institutional investors into taking a high proportion of Global shares rather than taking (relatively) undervalued LiLaC shares.
  • Since the merger details were announced, Liberty Global has fallen by about a fifth.  So you should do your own homework as to the relative valuation between Global and LiLaC.

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