DB's post last week on smart money gave good opportunity to...

DB's post last week on smart money gave good opportunity to revisit some thinking. I think understanding the concept of smart money is interesting but by default that implies to me there is also dumb money.  For me avoiding dumb money is the key but that inevitably means missing out on trading opportunities due to fundamentals and personal risk tolerances. All this is subjective.

SSN numbers imo provide a very good insight into market drivers and how the different stages of O&G development are valued by the broader market, also the effect changes in the market can effect company valuations. Over the past 6 years SP has been much higher but fundamentally and even considering the low OP, the company is imo in a better position business wise today than it was when it hit it's high.

Below are some numbers taken from the June qtrly's. In itself the numbers are just numbers but when related to other numbers they can present a picture and from that we can draw our own conclusions.  Looking back over history we now know with hindsight what the future capex requirements were in 2011, also the future production and the ratio of success/failure for an O&G company as it attempts to develop new fields.

The above is primarily input from the qtly's but there are some assumptions in the calculations for my own use. The key ones are in the green box. Whilst some of the concepts are standard O&G it is all my interpretation. I use the logic for my benchmarking so the calculated production is using a standard price to equalise receipts to enable comparison to other companies and their EV calc's. Finding good companies is a goal and avoiding the not so good the primary goal. Things change though and having a common platform helps identifying good and bad changes when forecasting is added.

Some personal views on this.
- The future capex requirement in 2011 was higher than the cash on hand despite the company having cash. Therefore future dilution or farmouts were inevitable, as are delays and a share of dusters in the new undeveloped prospects. This feature is the same for most O&G juniors, story is the same and some get lucky early some don't.
- Production in 2011 was lower than now, Oil price was higher but so were costs. Over time and as the balance from explorer to producer switches it appears market is less enthused as it becomes easier to value the companies. Also as companies become self sustaining there is less need for CR's which means the smart money (financier's & DT's move on)
- Perception of future earnings, rocket ships, trains and talk of texas tea gets people excited. EV's, NTA, free cash bores the crap out of people. Selling a good story appears more beneficial than delivering one. Ultimately when the chip's are down the companies with good fundamentals will survive, whether they grow and prosper is yet to be seen.
- O&G has risks, attempting to understand the risks is imo fundamental to managing the risks for small investors. Same logic applies to all companies and understanding the cycles and where a company exists within that cycle is also important to form a view. Benchmarking several/many companies helps to compare but also provides greater insight to the industry than can be attained from following only one company.

These are just my views and am interested in other's opinions and insights. I find following the fundamentals is rewarding in itself and imo understanding O&G is a long journey with many diversions and distractions. Hopefully there is some general insight in the above. A question is when was the market correct?? and honestly it Beats me but fun trying to work it out
Have a great weekend,  
Cheers