Value Investing Is it more difficult to manipulate Net Income or Free cash flow? |
- Is it more difficult to manipulate Net Income or Free cash flow?
- SRCI - SRC Energy - Valuing An Oil & Gas Company
- China Internet Report 2019
- New accounting short report out today on Omnicell by GlassHouse
| Is it more difficult to manipulate Net Income or Free cash flow? Posted: 11 Jul 2019 05:13 PM PDT My gut feeling says that FCF is harder to manipulate. Some of the methods of manipulating net income (shifting the timing of reporting expenses/revenues) don't change the FCF. On the other hand, cash flows can be manipulated in some additional ways Overall I'm struggling to determine if either one is more easily to manipulate than the other. [link] [comments]  |
| SRCI - SRC Energy - Valuing An Oil & Gas Company Posted: 11 Jul 2019 08:49 PM PDT Whilst I'm not a huge fan of investing in commodities like Oil & Gas, base metals, and etc., I thought it'd still be interesting to make today's article and video about this topic, and will be using SRC Energy as an example company on how you may want to approach valuing Oil & Gas equities. Reasons why I dislike commodity equities:
What are reserves? There are 3 types of reserves:
As mentioned above, this is measured by "competent persons" and is their best educated guess, based on various techniques and methods - it's uneconomical to dig up an entire patch of ground or a seabed to make 100% certain, hence there is always room for human error. There are also "resources", which happens to be measured by the same group of "competent persons" - these are not classified as reserves because they're less confident about these, hence why they're classed as "resources" - all of this seems highly anecdotal to me, which is why as an average retail investor, I think it's safer to discount the potential value of these "resources" (unless you're well versed in reading 150+ page technical reports, drilling, fracking, engineering, geology, etc.)... What are SRCI's reserves worth? Based on the tables below, I've used SRCI's proven reserves as per their FY 18 report. As you can see on fig 1, they have 88mm Bbl's of oil, 771.9 bn c/f of gas, and 89.1mm Bbl's of NGLs (proven). On fig 2, I've plotted their operating and net margins - these are inclusive of cash costs, and all expenses such as royalties, sustaining CAPEX, OPEX, project CAPEX, and even derivative gains or losses (because commodity companies sell into the spot market, but they always have a portion of their book hedged). What's important to pay attention to is that they will always achieve a sales price less than the spot price, for this very reason. Therefore, it's also important to discount the net value of SCRI's reserves by the average percentage difference in realized vs. spot price, in addition to a 10 - 15% margin of safety discount one would normally apply. Other factors to consider:
If you prefer a video analysis, please see below: In summation, I believe SRC Energy is trading at or slightly above fair value, when comparing their Enterprise Value to net value of reserves (at the average price). If we see another oil bear market, then SRC Energy will become loss-making (like back in 2015-2016), therefore there is not enough of a margin of safety to consider this stock just now. [link] [comments]  |
| Posted: 11 Jul 2019 04:48 AM PDT |
| New accounting short report out today on Omnicell by GlassHouse Posted: 11 Jul 2019 09:18 AM PDT |
| You are subscribed to email updates from Value Investing. To stop receiving these emails, you may unsubscribe now. | Email delivery powered by Google |
| Google, 1600 Amphitheatre Parkway, Mountain View, CA 94043, United States | |
No comments:
Post a Comment