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There is a difference Whisky. And while the article made some...

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cmonaussie

11,254 Posts.

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09/09/14

11:16

Post #: 13945319
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Originally posted by whisky49 ↑

One of my favourite posters, a Geologist, comments on another site in regards to the same article.

"A few critical facts worth understanding. First as far as investors in Halcon or any other company being INTENTIONALLY duped: it’s been understood for many decades that nothing will kill your drilling program faster than your own geologists falling in love with their own sh*t. Seriously: once we geologist really believe our analysis we can put a Mormon evangelist to shame when it comes to telling a convincing story because we really, really do believe what we’re preaching. And it’s not that uncommon for us to be really, really WRONG. LOL. I’ve only drilled two sure shot can’t miss wells in my career and they both missed.Second, spending more capex than your income is not a measure of bad policy. Think about it: if you invest $1,000 and get a return of 20% (pretty dang good these days) what does that mean? You spend $1,000 the first 12 months and receive $20 income. IOW you spent 5X as much as you earned. Now think about the stat they threw out: spend $1.17 this year when you’re getting back “only” $1. IOW you spent $1,000 this year and only made back $855. That’s a good bit better than making $20 at 20% interest, isn’t it?In my job if I spend $200 million of my owner capital and he received just $150 million back that year from those wells he would probably give me a multi $million bonus this Christmas. The term is “payback”: how long it takes to recovery the total investment. Essentially if I spend $1 million this year and produce $1 million worth of revenue it amounts to a 100% rate of return. IOW I’ve recovered 100% on my investment in a 1 year. But wells don’t tend to stop producing after 12 months. In the example above the wells make $150 million the first 12 months, then $120 million the next 12 months, then $90 million the next 12 months, etc, etc. Ultimately that $200 million investment generates $600 million in revenue.This emphasizing how much capex companies are spending vs how much revenue they receive that same year is ridiculous. If Apple spends $300 million to build a factory making IPads and they only sell $200 million worth of tablets that first year is that a bad thing? Of course not. The critical question is if a company spends $X will that investment ultimately produce $X+ at an acceptable rate of return. In truth spending $1.17 to earn $1 the first 12 months and then to continue to receive revenue for some time beyond that first year sound pretty good, doesn’t it? What if those wells that generated the $1 the first year generate just $0.50 the next 12 months…and then $0.20 the next 12 months… and then $0.10 the last 12 months of its life? So the $1.17 investment generates $1.80 over its 4 year life: you just made $0.63 profit over that time. IOW your made 54% on your investment in just 4 years. Anybody here making that sort of return on their savings today?So the stat they throw out as condemning current operations actually sounds pretty damn good. If fact, so good I tend to question its validity. It might be true but there’s no details offered as to exactly how that number was calculated. OTOH that’s one of the beneficial aspects of producing a fractured reservoir: while they may suffer a very high decline rate compared to a conventional reservoir they also tend to INITIALLY produce at a much higher rate than a conventional reservoir which, in turn, gets you to payout much faster and yields a higher ROR.I do know there are companies losing their asses in the shale plays. I also know of companies making fantastic profits. Trying to make gross generalizations is pointless IMHO. You want to know how the shale plays are doing in general: analyze the details of every company drilling those plays and post a histogram. Good luck finding the data to do that: it would take an individual tens of thousands of hours to just come up with a very rough estimate. Folks can speculate to their heart’s content but no one can post facts to back it up."

Cheers Whisky

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There is a difference Whisky. And while the article made some reference to averages (such as the $1.17 spent on every dollar earned) it also made specific references to HK which are concerning.

Look to the DA in the EBITDA and you can find some of the answer. Then look to the X in the EBITDAX. Look to the full cycle 1P Recycle ratio (which includes acquisition and not just D&C which is half cycle).

But IMO - and at this point in time - look at the amount of Debt (for HK) supporting its proved (that is 1P) Reserves. That has to be "uncomfortably" high don't you think. And how much of it is being "payback"?

Maybe that's why your friend is a geologist.

And BTW not at all ever even suggesting "INTENTIONALLY duped" - that is your posting reference.

AKK Price at posting: 2.2¢ Sentiment: Buy Disclosure: Held
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