great value..., page-10

PSA and STX is a fair comparison since they are both primarily gas producers in the US, though PSA is mainly offshore while STX is onshore. But you have to look at their assets (reserve) backing vs market cap (not share price).

PSA (market cap of 90mn) is currently producing a net of about 3-4BCF per qtr, so annualised production should be around 12-16BCF. As part of their US100mn acquisition, they hed to hedge a large portion of their gas price at around US8-9. Their net debt was reported in the most recent qtrly to be down to US41. Their annual revenue should come to about 120mn, most of which will be used to pay off outstanding debts and fund drilling. I have held a small portion of PSA for quite a few years now, and to be honest, it's been a bit disappointing as they have continued to report losses after losses. I believe the current price is also unjustifiably low given that once they pay off the debts, their US acquisition would be totally earnings accretive. In the mean time, they have had the misfortune of having their production being scaled back because of third party infrastructure fault (leaked pipes, etc), outstanding hedge of 10BCF at around US8.50 to fulfil, and several dry holes at their onshore venture (Moonshine). Most importantly, their 2P reserve is at 35BCF.

STX (market cap of 82mn) has no hedge, and a debt of about 8mn. Their annual production will be around 4.2BCF with associated condensate (which is about 20% of produced gas). So their net production should be about 5BCF (which is set to rise as more wells come on line). In addition, because it is onshore, the margin is much higher as drilling cost and opex is much lower. So they profit margin will be far greater. 2P reserve net to STX will be 35 to 52BCF (assuming overall res to be 200-300BCF), but this will ultimately depend on what the overall recoverable reserve is for Rayburn.

So while I agree that both are undervalued, the big differentiating factor to me is that fact that I see the margin from Rayburn being far gearter than those from PSA's producing assets.

Looking across the small/mid cap energy sub-sector, almost everyone has been hammered - VPE, ETE, BOW, KEY, AZA, ROC, BPT, PPP, INP, etc etc etc. It looks as if money has been pulled from the entire sub-sector (and not for the first time in the past 18 months) despite the rise of oil and gas prices. If you superimpose the chart for HH gas spot and WTI crude spot over the performance of small/mid caps with producing assets/revenue, you'd see the disconnection between them - which only means one thing - that the sector is getting VERY cheap.

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