Oil Stocks CHK WLL – What Is Their Worth?


(1) CHK share price $ 16.74, NAV $ 32.5

CHK is my favorite oil or natural gas stock. Here is the updated NAV table from CHK's July 2004 earnings release:

CHK PV-10 table per NAV share vs natural gas price

N NAV gas price per share

$ 4.50 $ 16.11

$ 5.00 $ 19.60

$ 5.50 $ 23.11

$ 6.00 $ 26.61

$ 6.50 $ 32.5

PE = 10 or 10% of the yield is considered a reasonable assessment for non-growing companies. PV-10 Net asset value (NAV) is a standard calculation for the value of the oil or natural gas reserve assuming current production costs and expenses. When the price of gas N = $ 4.5, CHK will make a real profit of $ 1.611 per share per year with current production / exploration expenses. CHK is worth $ 16.11 at the price of $ 4.5 in this case. We can imagine that as if CHK were a bank deposit account, the interest rate was 10%, if we deposit the principle of $ 16.11 in it, we get 10% interest return or 1.611 each year $ interest per year.

For the first half of 2004, the price of natural gas was between $ 5 and $ 7 on average at $ 6.0. The price of natural gas reached $ 9 in the second half of 2004. The CHK share price is still below $ 17 recently and its reported quarterly net profit has greatly underestimated its true profitability.

* Safety margin – CHK

Wall Street analysts have predicted a significant drop in the price of N. gas or the price of oil in the next 2-3 years. Therefore, CHK or all oil and gas stocks are trading as if the price of N. gas is between $ 4 and $ 5 or the price of oil is between $ 20 and $ 30.

First of all, I don't agree that oil or natural gas will go down a lot from here. Inflation, the weak dollar, China and the strong US economy justify the current high price of energy. The price of energy will remain high for quite a long time. Wall Street analysts still live in the past memory of the low oil prices in the world of the 1990s. In fact, the current price of oil is still half the price of the peak of the 1970s if we adjust the price. inflation from that moment.

Second, even if I’m wrong and Wall Street analysts are right, and the price of natural gas drops to $ 4.5 or the price of oil drops below $ 30 in the next 2-3 years, CHK's current price has already taken into account such a low energy price (see table above).

Third, the NAV is a moving target. Specifically for CHK, the ANR has recently increased by 20% to 25% per year.

* CHK – ANR growth of 20% or $ 3 per share per year

Neither CHK nor WLL pay a dividend. They reinvest all their profits in the acquisition or drilling for more oil or gas reserves. Therefore, the net asset value based on reserves, adjusted for cash or debt, reflects the true net asset value of the stock. The annual increase in net asset value based on reserves reflects their true commercial benefit.

The net asset value per share of CHK has increased from 20% to 25% per year or $ 3 per share currently. Even if energy stocks continue to trade at their current low valuation to reach their real profits, the CHK share price is expected to increase by 20% to 25% in yield per year simply due to the increase of its net asset value. If Wall Street finally accepts the high price of energy as the norm in the future, CHK will be able to reward shareholders even more.

CHK mainly achieved this excellent operating performance through the following measures:

Low cost drilling and rapid growth in organic production. Organic growth in organic production for the current quarter was 11%. It is one of the highest in the industry.

Excellent acquisition record. In recent years, CHK has been able to significantly increase the production of short-term acquired goods, so that CHK's acquisitions have benefited current shareholders. Even if the last acquisition is slightly dilutive on a reserve basis, it should be accretive on the basis of cash flows or profits.

Efficient and effective coverage program. CHK has been able to obtain higher cover prices than industry prices in recent years. CHK is not locked into a cheap long-term contract like many do. For the current quarter, CHK achieved a low gas price due to previous hedges, so its earnings per share were stable compared to last year. CHK's coverage is slight in 2005 or beyond, so higher prices can be expected in 2005 or beyond.

(2) Stock price WLL $ 31, NAV $ 63

WLL is trading at a discount even on the private purchase price and on very small multiples of its cash flow. WLL also has a very experienced management team with long experience in the oil and gas sector.

WLL declared $ 63 per PV-10 NAV share in the latest quarterly earnings report. Currently, WLL is trading significantly below its PV-10 net asset value. In fact, WLL also trades with big discounts compared to its peers. WLL is trading at $ 1.32 per Mcfe reserve. The industry's current average purchase price has been $ 1.5 per Mcfe reserve over the past 1.5 years.

For the first half of 2004, WLL generated 18% annualized return after replacing all of the depletion of reserves. The recent acquisition of $ 44 million is accretive to 1.11 Mcfe per reserve cost. It is accretive in terms of reserves, cash flow or income. With more accretive transactions like this, the growth of ANR WLL may be 20% per year or more instead.

The last two quarters have reported annual organic production of just 2%, much less than expected growth of 5-10%. However, output growth is an overvalued performance measure on Wall Street. Most importantly, WLL has not wasted money on excessive spending. WLL simply did not spend any additional drilling investment expenses. The cost of replacing the WLL reserves was still low. From an investor perspective, even if WLL’s production growth is not as good as that of CHK, WLL NAV can still grow 18% to 20% annually with smart accretive acquisition and low cost drilling.

(3) Conclusion

I continue to love WLL and CHK. I continue to hold WLL CHK in the Blast Investor Real-time Plus model portfolio.

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