Read and be inquisitive

IMO y'all should read this article

http://finance.yahoo.com/news/drillers-pile-more-debt-oil-040001921.html

Some of my favorite quotes (and the bolding is mine for emphasis)

"Wilson once told investors that the acreage might contain the equivalent of 1.2 billion barrels of oil. He fixes his interlocutor with a blue-eyed stare and leans forward. At 67, he bench-presses 250 pounds (110 kilograms) and looks it."

"..He responds, unsmiling, with a one-syllable obscenity: "F---." Wilson has reason to curse,......Halcon spent $3.40 for every dollar it earned from operations in the 12 months through June 30. That's more than all but six of the 60 U.S.-listed companies in the Bloomberg Intelligence North America Independent E&P Valuation Peers index. The company lost $1.4 billion in those 12 months., more than any of its competitors. Halcon's debt was almost $3.2 billion as of Sept. 5, or $23 for every barrel of proved reserves

"Standard & Poor's rates the debt of 41 of the companies, including Halcon's, below investment grade, meaning some pension funds and insurance companies aren't allowed to invest in them. S&P grades Halcon's bonds CCC+, which the rating company describes as vulnerable to nonpayment"

"Like many of its peers, Halcon uses two sets of numbers to down as proved reserves. The SEC requires an annual tally and limits these calculations to what the firm is reasonably certain it can extract from existing wells and other properties scheduled to be drilled within five years, based on factors such as geology, engineering and historical production.

"To investors and lenders, Halcon also highlights a much higher figure that it calls resource potential..."the SEC forbids companies from making resource-potential claims in official reserve reports. The agency doesn't regulate what companies say at investor conferences, in press releases or on their websites. No one does."


"There's a lot of ways to make money in the oil and gas business, and not all of them involve drilling for oil," he says. "You just drill investors' pocketbooks. When investors are willing to throw money at you, you can just make money on that. It's a time-honored tradition."


And the piece de resistance

"Asked in the July interview how much faith investors should put in resource estimates, Wilson says: "They shouldn't put hardly any in them. They should just put in the idea that there's some upside there. And if the practitioners are good at what they do or lucky, that upside might get turned into value."


OK - so its an interesting article (and I'm not mad at HK for putting up a wall and not answering questions so I'll find a negative article. Its a timely article and serves to remind us AKK shareholders - the junior partner holding a 30% WI in about 5% of their 100K acres)

But it is relevant to everyone who ....
1. mentions debt and rerate in the same breath
2. mentions $400M odd NPV

because HK has $23 of debt for every bbl of Proved Reserves (thats 1P folks) and outspends its cash flow $3.40 in spend to every $1 earned.

Yes production growth addresses the problem - but they must hit it every time and those writedowns mentioned at the beginning of the article have created a steep hurdle to get over.

Runs on the board (i.e. growing boepd in EFS) will put debt to good use. One or two screw ups in Pathfinder with OPM and we get to enjoy that sort of hurdle too.

Concentrate on 1P!

Bet more than a few are surprised by the price of oil .... supply and demand at work