rogermontgomery.com, page-15

"One thing he said was that he would not invest in oil and gas stocks because of the inherent risk of there being nothing in the ground being of value"

I would respectfully suggest, then, that he has no business looking at stocks in either the O&G sectors or in the mining sector and that his views are of little interest to investors in those sectors, who are well aware of those kind of risks.

There have been conversations on the TXN board (ASF I think) about the pros & cons of maintaining control stakes in projects and acting as operator. The 'pro' is that the company can control its development programme to suit its own book (though drilling to secure leases acts as a constraint to full freedom). The 'con' is the concentration of risk. If a well goes wrong, the whole or a greater proportion of the risk falls on the company.

Because of its diluted interest and the sheer scale of the drilling programme, AUT should be pretty insensitive to the occasional well failure and Hilcorp doesn't hang about worrying and poking around a problem well, it just moves on and drills the next one. It can always come back later when the leases are secured. But there don't seem to have been many that have caused trouble.

Thus, though in the same sector and even the same geographical and geological resource, AUT and TXN have different risk profiles. That is not really addressed in any way by his analysis. At the extreme, we also have the very high risk exploration activities offshore the Falklands, which, in the case of Desire Petroleum, was an all or nothing venture - quite beyond my risk tolerance.

That contrasts with a UK minor company I am invested in looking to drill offshore Sicily: they offloaded 100% of the exploration and drilling risk of the first well onto Shell, ceding from 55% to 75% of the licences to achieve the farmout. The potential resource is big enough to attract an oil giant. 25 - 45 % of that potential is a company maker and they have plenty more licences to play around with.

So risk can be managed.

The risk to AUT and TXN is more of an engineering/technical nature and can be addressed by paying the money and contracting in the experience and expertise.

Applying valuation criteria across the board on a "one size fits all" basis is just rubbish.