I’ve spent some time (way too much) finding what makes TEX tick....

I’ve spent some time (way too much) finding what makes TEX tick. Also used it to work up a model to value other oilers. Dissected the accounts, 2006 listing disclosures and May's Target Statement. Have changed my view 180 degrees.

Target markets itself as a low risk field owner with exploration upside. The development wells are low risk in that they’ve a good chance of finding oil/gas, and they do. I think it's worth digging deeper and considering:

Leases and Farmins
In the US this is a lucrative industry in itself. Known prospective areas are typically subdivided down into tiny areas – just like your typical land developer. Chalkley @ 33 acres and Snapper @ 60 acres. The company will never say this, but imo the tiny size greatly limits development upside.

TEX generally has to pay 1/3rd (of Tenement, G&G, Drilling and usually Completion), for their 1/4 (25%) interests. This unfavourably skews the risk/reward from day 1.

Also consider the history and geology of the producing fields. They are in mature areas which have been explored or worked-over for up to 70 years. These remaining pockets are typically small and may have been modified with the activity. A good example is Chalkley. Gas extraction from 1969-92 lowered reservoir pressure (by over half) and looks to have opened up water movement between levels. A heavy water cut, right from the start, is the thing you don't want when pumping oil.

Potentially lucrative pockets may remain, but imo what typically happens is that maintaining decent flow rates from small pockets is hellishly difficult. This has led to “successes” actually being slow motion failures. Thoroughbred and Garwood were definitely in this category.

Fiscal Load
TEX doesn’t receive full Henry Hub gas of WTI spot oil prices. Deduct:
- the wellhead discount – around 9%
- the royalty burden – currently around 31% (on the wellhead price)
Take these off - that leaves the gross Revenue the company receives (& shows per its annual accounts)

Then on the expense side allow for:
State severance taxes – 12.5% (on the wellhead price). Louisiana has the second highest rate in the US.

All up, a gross profit contribution of about 51% of the quoted HH price is left from gas production.
For oil, the water cut influences the outcome, but around 40% of the WTI price is about right at present.
These taxes and costs generally move with price, so if spot prices rise, TEX will still only benefit by 50% of the rise and 40% for oil. It’s important to understand these dynamics.

Ongoing costs for this company are just too large given the free revenue thats left. TEX needs a big wildcat strike to change the slow motion decline. I'm out, but hope for holders sake that it does happen.