T-bone1

Harry, I realize there are two sides to every argument, that's why I was asking for your side. I didn't call you a gambler or lecture you on gambling, I said I would rather hear your valuation argument, rather than have you quote the song, "the gambler". My short thesis, if you read it, is not that the company won't sign up millions more subscribers . .. I'm sure they will. I think they still won't make any money due to content and delivery costs when they do. Do you have a response to this argument? I am not trying to be confrontational. You wrote: "in the end, my reasons don't matter" . . . but that's precisely what I'm interested in, your reasons. The purpose of this board is to have discourse and have people discuss different sides of an argument to help us all make better investments and be better investors. I never said you were dumb, and I have congratulated you on what has no doubt been a very succesful position for you. I am just interested in why I might be wrong. You wrote, "Don't stoop to deigning to tell others that you are the arbiter of what is and isn't value investing." . . I didn't, I just said that I'd like to discuss value, not how much your position is up. I have gone through and read your blog and your "valuation work" on EBIX as well as your very impressive "more subscribers" valuation of NFLX . . . I have decided you are a windbag who has no idea what's he is talking about. So really I would be interested in discussing the long thesis with some other NFLX owner who actually has a thesis. I will tell you what is and is not value investing: It is discussing the value of a company rather than the movement of a stock price. That is all, and this board is the place for it. I think you add nothing to this board because you don't discuss valuation. Your EBIX piece, which you were so offended we didn't all discuss with you, had no valuation whatsoever. EBIX is a software company that has grown through acquisitions. In an article where you apparently interviewed yourself you wrote: "Can you talk about valuation? How does valuation compare to competitors? I would estimate that they will generate somewhere between $40-$55 million in free cash flow next year. (It's better to be roughly right than precisely wrong.) That puts the stock at roughly 10-14 times free cash flow. The valuation is ridiculously low. I'm only doing this interview because I think it's one of the great inefficiencies in this market. There are really only two views you can take on this stock. Either it's one of the best growth stories in the U.S., or the numbers are too good to be true. I've visited Robin Raina at his headquarters in Atlanta, and I think he is one of the most rational people I have ever met. I like him, and I trust him. My money is staked on the notion that the numbers are very real, that he is an excellent manager, and that this company could grow for years. You're getting a Phil Fisher stock at a Benjamin Graham price. That's the name of the game. I would encourage the institutions to make the trek to Atlanta and to sit down with Robin. I think they will come away impressed." There is no valuation there Harry. Do you have a discounted cash flow model? An idea of whether they might have a moat or the value and metrics where similar companies trade? I congratulate you on being a succesful growth and momentum investor. While everyone else has been polite enough to ignore you I would prefer to see this board, which is a great resource for value investors, not be polluted by ideas without any analysis by someone with no interest in discussing the value of a company. I apologize if I have somehow gotten you all wrong, but I doubt it.

With all due respect, I thought this was a board dedicated to value investing. I'm glad Harry made money, but I don't think speculating on overvalued stocks and calling it a gamble is a valuable contribution to the discourse. If there is some reason that NFLX is possibly worth this price I would love to hear it. The analyst consensus cash flow per share estimate is $10 for 2011 and $15 for 2012. The cost of content doesn't show up in the income statement, or in cash flow from operations, but it does show up in cashflow from investing activities. They are currently spending about $200 million per year to get content. They have just signed a deal to pay EPIX $200 million per year for the next five years on top of this, and they have yet to renegotiate with STARZ, at what will certainly be a higher rate than what they pay currently. It looks like they will easily be spending $400 million per year on content in 2012, and this number will only rise. This puts free-cash-flow at about $7 per share (using 50MM shares) in 2012 . . . still nothing to shake a stick at (If content cost $500 million, which is likely, it will be only $5 of FCF in 2012). This FCF is largely due to the cash flow benefit they will recieve from lower postage cost as more customers start streaming content. They only have about $4 per share in debt, so I will ignore that, and say that on a market cap basis they are trading at almost 23X 2012 estimated free cash flow . . . and this is two years from now when growth will likely have peaked and a lot of the benefit from lower mailing expense will have been realized. I expect FCF to decline from that point, as NFLX is squeezed out by the players that actually have a foot on the court (content developers, owners of delivery infrastructure, owners of a box in my livingroom). The risk to my thesis is that they use their overvalued stock to buy content, like movie studios (I don't think buying STARZ would help as it creates very little content and they would be back at the door of the studios). This would make the company more durable and less overvalued, but people probably don't want to pay 60X earnings for a movie studio, so the stock price would still fall. If we call the after-tax-gain in book value for FFH free-cash-flow (which it essentially is), and assume it is 15% per year, then 2012 FCF for FFH is $75 USD. This is a good company that will grow for 20 year and its trading for less than 6X 2012 estimated FCF. This is why I think NFLX is overvalued, that and because the FCF yield is about 4% on what I view as a declining asset. When FCF never materializes at NFLX or they have any other hiccup the stock will decline. This is why I'm short. There is no margin of safety for a long "investor" here, and while it has worked out very well, the purpose of my question was to ask why a holder would continue to own the stock at these levels. NFLX has been and is a tremendous company, and have survived predictions of demise from many people smarter than me. However, they were able to do this based on their ownership of the delivery infrastucture and content (DVDs and mailing centers). Going forward there is no reason for the studios, the cable companies, or AMZN, AAPL etc. to let them take a big slice of the pie. AMZN makes a lot of their money from selling DVDs and needs to defend this market. This is why there used to be rumors that AMZN would buy NFLX. This never happened, because without the mailing business, AMZN can build NFLX from scratch for a few hundred million - including subscriber acquisition. This is the value of the "virtual" NFLX business. Bargainman, you make a very good point about shorting growing "story" stocks, and I agree. You give a very good reason to not short the stock regardless of valuation, but I would like to hear a reason for owning the stock. This is not a momentum investing board . . . I don't mean to be rude, but if I wanted to hear someone quote "the gambler" and brag about owning a momentum play that they either don't understand or are not interested in discussing, I would go to a yahoo message board. I shorted more at $165.81 this morning because I think it is overvalued for the reasons above, and because I think this recent move is a huge overreaction to Blockbuster filing chapter 11 (which does not remove them as a competitor if that mattered). I expect higher content costs, lower projected FCF, the STARZ negotiation, the next quarterly report or almost any other catalyst to move the stock price lower as there is no margin of safety. This is why I shorted the stock. Would anyone buy the stock at these prices? why?

Harry, congratulations on such a good trade. You have certainly been on the right side of this. I am curious, as I have talked to other NFLX longs, what exactly is your thesis? If watsa_is_a_randian hero is either right or wrong in his short thesis, I am curious what you are right or wrong about. You have certainly been right about the stock price, but what do you expect to happen from here? Do you have some theory on how the company will grow into this type of valuation, or how they will handle the rising cost of content and increased competition? As I said, I am short the stock, but I'm not trying to be confrontational. If I am wrong about the company (I've certainly been wrong about the stock so far), I'd like to learn it immediately from you and cut my losses rather than continue to lose money. thanks

I agree Myth and Harry . . . I think valuation wise (and business prospects wise), this short is as compelling as any long I've ever seen, but the dynamics of shorting make it a much worse bet. I think NFLX is worth about $50 and CHK is worth about $60 (NFLX trading at 3 times my valuation, CHK for 1/3) . . . but if both prices move to my values, I only make 66% on NFLX, while I make 200% on CHK. I may never short an exciting company again. I think GMCR is similary valued and similarly scr*wed as NFLX (losing pattent protection on their K-cups), but there are just too many headwinds (return dynamics of shorting, when it moves against you it becomes a bigger rather than smaller position, long investors are crazy, etc.). I am not covering NFLX, and I expect to make money on the position, but this has been a painful lesson. I think I would rather be 30% cash than 100% long and 30% short, even if they shorts are trading at ten times the value of my longs.

I think he bought almost all of his stake (at higher prices than here), and I believe he - like Aubrey McClendon - bought even more on margin and lost a fair amount in 2008: ""Oklahoma City-based SandRidge focuses on the exploration, development, and production of oil and gas in the West Texas Overthrust, East Texas, and Mid-Continent (Oklahoma) regions. "President, and CEO Tom Ward purchased 460,000 shares at $48.95 on May 19th/20th, which increased his already substantial holdings to nearly 36.95 million shares, or a 25.27% stake. "It was the first purchase for Ward since he announced in March his attention to buy up to $100 million in stock on the open market this year. His only other open-market purchase came in November 2007, when he took down 4.17 million shares at $26.00 in the company's initial public offering. "Daniel Jordan, a SandRidge director, also bought 60,000 shares at $48.41 on May 16th/19th, which increased his holdings to 1.1 million shares. It was his third purchase. Several insiders bought into the company's IPO last fall and another director picked up $200,000 in stock in March. "Ward, a self-made billionaire (and minotirty owner in the Seattle SuperSonics) has been the chairman and CEO of SandRidge since June 2006 and the president since December 2006. He made his billions as the co-founder, former president, and chief operating officer of Chesapeake Energy (NYSE: CHK), one of the largest independent natural gas producers in North America. "When Ward retired from Chesapeake, he told the Oklahoma City Journal-Record earlier this year, because 'it was just time for me to move back to a smaller company, back to something I could get my arms around operationally.' "Meanwhile, SandRidge got its start as Riata Energy in 1984 by Malone Mitchell, III. The company grew to become the largest privately held land driller in the U.S., and in early 2006, filed for an initial public offering."

that's great stuff, thanks longinvestor

today was unpleasant, but the facts (as I see them) are comforting: the Jeffries analyst, raised his price target from $128 to $175 while simultaneously lowering his 2011 earnings estimate from $4.65 down to $3.80 on Monday. You can't make this stuff up! His earnings estimate is still above consensus and he lowered it because . . . higher content and postage costs whoever owns the content will squeeze them (huge fees for EPIX, upcoming renegotiation with STARZ), whoever owns the pipe will squeeze them (USPS, CMCSA, TWC . . . not to mention LVLT etc.), whoever own the user experience will squeeze them (everyone is only to happy to have netflix on their iTV, Xbox, googletv, wii, etc. right now . . . but apple, amazon, bestbuy, google and microsoft, comcast, time warner etc. want to be content providers, and they own the livingroom). There is no way the projected margins or market share ever materialize, but the stock price would be no more silly at $200 than it was at $140 . . . hopefully it won't get there.

watsa_is_a_randian_hero, I couldn't agree more with your analysis and the article (although I don't think the article gives enough weight to HBO's new online presence) . . . and I have also been short since that level and adding . . .

wow, that is a little chilling. Is anyone aware of the nature of these posts? I would hope they were clearly libelous and false, and not merely criticism.

this sounds like a huge notional value of swaps . . . I wonder who else has exposure:' IBM IBM warns its organic growth and/or M&As could be harmed if it is named a "major swap participant" - FT ($131.98) (09/21/2010 22:35 ET) An executive tells a conference that such a Dodd-Frank designation could tie up $5B of capital as margin requirements for its derivatives portfolio, which she says would eliminate a year of acquisitions, or eliminate some possibilities for organic growth. She says there would "obviously" be an "impact on jobs."

Nomore, I have no problem with zero hedge or anyone else critcizing these guys, they are fair game, and zero hedge is something of a muckraking forum. My problem is only with shroeder, who isn't in that line of work, taking advantage of the access and fame afforded her by Buffett to become his personal number one critic for profit (or just to be vindictive for some unknown crime). I'm not saying she can't do this, I'm just saying that I find it a little repulsive that she of all people would do this for money. If santelli wants to become a buffet basher, that's fine with me, but I think shroeder got her fair chance in the book.

I agree . . . there is nothing wrong with criticizing Buffett and Munger . . . but there is something that doesn't pass the smell test with Shroeder. Her only claim to fame is that Buffett invited her into his inner circle and allowed her to write a sure bestseller purely based on the access he allowed her. For her to turn around an make a cottage industry out of criticizing him at every turn - in sensational fashion no less - stinks. Of course Buffett isn't perfect, but she didn't uncover a watergate-like scandal at Berkshire either. Buffett is an old man nearing the end of his carreer, who has created more jobs and wealth for this country than almost anyone else living or dead. During this time he has made himself unpopular at times by striving for better corporate governance, telling it like it is, and leading by example. He is giving all his wealth to charity and his ethics are second to none. Does this make him above criticism or reproach? Absolutely not. But Shroeder was given more information than anyone else so that she could tell it like it is in the book (and I think sensational family drama went beyond telling it like it is - implying someone's dead wife had been sleeping with her tennis coach doesn't exactly add to the discourse). Whatever she did in the book is fine, but to go on the road and keep hammering this guy for attention/financial gain is dispicable. If she is a journalist and this is her duty, why not find someone else to pick on? Buffett behaves better than 99% of American CEOs in all things. If she isn't just vindictive or disgustingly profiting from the Buffett aura, why not apply her superior journalistic skills and pass judgement on Jamie Dimon, Hank Paulson, or any of the other 99% of CEOs who are more deserving of criticism for their self-dealing, talking their own book, etc.

Myth, with regard to a super-spike before drillers can ramp up, a few things: 1) 70-80% decline rates on new wells are the norm, but SD is right, for all shale production its more like 40-50% - this is because most shale wells are older than one year. While older wells have lower production, they also have lower decline rates. You might have 50% of shale production as 6 months old declining at 70% and the other 50% of shale production is 2-6 years old and declining at 30% on average. Older wells also had less fracs, so they always had lower decline rates, but decline rates "level out" for wells in each year they age. legacy production declines at around 10-15% (gulf of mexico is higher but is only 10% of total production now), so combined with shale the total decline rate for pre-2010 wells is around 20-25%. This number will go up each year as the percentage of total production that is shale <1 year old rises and as the decline rate of legacy production goes up as more shale is added to it. 2) There are only about 600-700 rigs that can drill these wells economically (top drive AC-driven modern rigs on skidpads). They are currently all being used and a larger and larger percentage each year is being used for oil shale (bakken, eagle ford, niobrara, etcc) or gas+liquids (eagle ford condensate window, granite wash, marcellus condensate window) drilling. Helmerich and Payne is only contracted to build 19 more right now, and they have 1/3 market share. At the current rate we will probably need 600-700 more by 2015 and I don't see any way that we get there without higher gas prices (newbuilds are generally only built on contract, and without new contracts no one wants to commit to taking more rigs than they currently have). 3) All the frac crews (with 10-20 huge compressor trucks that wear-out after 3-5 years) are currently in use, with long wait-times in the haynesville and Marcellus. Midstream pipelines, gas treatment plants, condensate pipelines, ceramic proppant and trained personel are all current and future bottlenecks. Doubling shale production in 5 years is just not feasible at these gas prices (or $6-7 gas) in my opinion. 4) Companies aren't really making money at these prices, and most won't make money at $6 gas. These plays are only good in certain areas, which are still being deliniated. Once investors and companies realize where the "core" area really is they will stop drilling all the "hope and pray" wells that turn out to be uneconomic. Origionally people thought the Barnett shale would be good in 10-20 counties, now they only drill in Johnson and Tarrant county where CHK built a dominant position. The same thing will happen in other plays as the central PA marcellus and East Texas Haynesville are abandoned until $8-9 gas. I think these factors make it likely that we have a large spike before drillers can ramp up . . . I don't think a real ramp up (double current shale production as is currently projected) can take place without $8+ gas . . . and there is no indication that gas is going to drift up to $8. What I think is more likely is that gas stays low for another 12-24 months as companies race to hold their leases by drilling. But decline rates combines with either bad weather, rising demand (either industrial or from the EPA shutting coal plants, or both), hurricanes, etc. can cause an immediate deficit in any given year. When this happens, prices will probably go to double digits and companies will scramble to build more rigs, hire more personel, build more frac trucks, reserve drill pipes, build midstream pipelines and treatment plants, secure water supplies, etc. The ramp-up will not be easy and it won't happen until high prices have already arrived, which I think makes a 1-2 year spike very likely. Companies will definately hedge at $8-10 gas, but I don't think anyone would at $6 after this year - companies just aren't making an economic return at those prices. With regard to your other question, CHK says they will be 25% liquids (mostly oil) by 2015. CHK will change their plans like they always do, but that's what's possible - nowhere near the oil weighting of SD in the near term, but impressive for organic growth from a company that size. As far as the majors and gas, you are correct . .. its the only game in town. They can't get there hands on politically safe oil so they have to buy gas. I think the gas market is global within 5-10 years through Gas-to-liquids technology, LNG (exported from North America), and increased gas switching in the US. When this happens gas should trade between 1/6 to 1/10 the price of oil . . . $7-12/Mcf currently . . . double that if oil is at $150 when this happens.

The article states that CHK has sold 90,000 call options on natural gas with an average strike of $8.08/Mcf between 2013-2020. Each contract is for 10,000 mmBTU or roughly 10,000 Mcf (Mcf= 1,000 cubic feet) . . . so they have sold calls on 900 Bcf of gas (900 billion cubic feet or 900,000,000 Mcf). If we assume that this is spread evenly over the 7 years in the article, then they are selling calls on about 130 Bcf/year of production. CHK's latest presentation projects that they will be producing 4.9 Bcf/day in 2015, 75% of which will be gas. I think its safe to assume CHK will be producing at least 4 Bcf/day of gas over the 2013-2020 timeframe (just 10% growth suggest it'll be closer to 5Bcf/day . . . or an extra 365 Bcf/year). I'm not sure how these calls are weighted, maybe they are mostly in the earlier years, but just averaging them over the 7 year period suggest that CHK is selling calls on just 33 days of production per year, or less than 10% of their production. The 2015 $8 calls should trade for around $0.73 based on volatility, and further dated ones should be higher, but if we assume CHK is recieving just $0.52 per call (total of $8.60) for 10% of their gas, they will have huge returns - hardly mortgaging their future. Now for the bad: CHK take this income from these call sales and adds it to the current year hedging program (i.e. they can hedge $1 billion dollars of gas next year at $5/Mcf, add on $200 million in income from selling longer-dated out-of-the-money call options, and the say they have hedged at $6/Mcf for next year). This is fully disclosed, but it is obviously non-standard, and like many aspects of this company, it is promotional. I don't like them counting the income as part of the current year or next-year hedging program, but I do like that this company is creative and finds ways to create value all through the company. If they end up selling the gas at $8.60 in some of those years, they have still made a good return . .. plus the $0.52 that they recieved up front will have compounded at 20% a year or so, meaning its actually worth $1.30 in 2015, so they are effectively recieving $9.32+ for their gas. Overall, I view this program as one more creative funding source and a positive for the company. The fact that they use it to improve their current operating cashflow and effective hedging price is obviously fuel for detractors and not the sort of thing a company like Fairfax would do, but it isn't dishonest, just promotional. If these hedges expire worthless this was a great idea, if not, its probably still a great idea compared to other sources of capital (debt, asset sales, VPPs, etc.). One more ugly positive for this unloved stock in my opinion.

Parsad, I agree with you that Munger (and Buffett) are saying that the bank bailout was good because it saved the common man from a worse fate, not because it saved the banks. What I would like to see Munger or someone else say is: The bank bailouts were a neccesary evil, and we are all better off for them being bailed out or things could have been a lot worse but the bankers and the shareholders of the banks (and maybe even unsecured creditors) should have taken a big hit. I am mostly in favor of saving the financial system (I think a total collapse might ultimately have been best for the US in the long run, but caused too much human misery), but there is no reason that the bankers or their shareholders should have been saved. I have yet to hear a convincing reason why unsecured debt shouldn't have been converted into a 90% equity position at every bank. This would avoid the problem of government ownership, punish the equity holders for poor supervision, and lower leverage at the banks. I think this is where Munger and Buffett are talking their book. They don't generally criticise companies they own, but Munger does obliquely say that it shouldn't be such a hyper-competitive business that reward hyper-competitive people. Purcell was forced out of MS for being too conservative. Paulson forced out Corzine then double crossed Thane (or was it the English guy?). Major financial institutions shouldn't be run like 3rd world countries, where the leaders need to bribe their subjects each year to avoid a coup d'etat.

thanks Myth, but counter-arguments are always appreciated . . . i'd rather learn I'm wrong from someone on the board than from time/the market. I like natural gas because: 1) it is trading below the cost of production 2) it is consumed every year for heating homes, power generation, making fertilizer, running factories etc . . . while it does have some exposure to the economy, it isn't dependant on expansion the way copper or iron ore is . . . even in a no-growth world we will consume roughly as much natural gas as we did before the reccession (same with steam coal, corn, oil). I think this makes it a much better bet despite no obvious near term catalyst . . . I would be more hesitant to invest in iron ore just because it is below the marginal cost of production. 3) unlike commodities like copper, iron ore, or even the oil sands, there are not large up-front capex costs . . . this means there is less barriers to exit. Copper producers can have a $3 per pound breakeven cost (including their initial mine capex) but have a variable "cash cost" of only $1 per pound, so they will produce at $1.50 for years on end until demand causes the cost to rise to the point where investment in new capacity is justified. 4) it is very difficult to store natural gas. It is easy to store metals and slightly harder to store oil, but natural gas needs to be compressed in underground caverns (which only exist in north america) or liquified and kept well-below freezing. US storage capacity pretty much fills up every year and will not grow very much (maybe single digit % per year as long as gas remains volatile). Once storage capacity is filled for a year (or gets close enough to put the fear of god in producers), prices effectively go to zero (or $2 like in 2009). There is nowhere else for the gas to go, so weak players go BK (either flaring gas or shutting in wells) and the supply situation for the next year starts at a clean slate (or 10% above the 5-year average at the most, like it did this year). 5) the first year decline rates on multi-frac horizontal shale wells (what everyone is drilling) is about 70%. This means that a well completed today will have production 12 months from now that is 70% lower than today. I think this is very important and that not enough attention is paid to this point. These types of wells account for about 25% of current production (legacy production from old vertical wells loses about 10% per year). This means that as shale prodcution increases, it doesn't need to just make up for the decline in legacy production, but every year it gets harder and harder to replace the 50%+ loss in production in shale wells from the previous year. Oversupply is obviously keeping current prices down, but here is what it percieved to keep them down for a while, and my responses: 1) Producers can make money at these prices and the horizontal gas rig count is at an all-time high, this will keep prices at sub-$5 forever. My response is that there are three factors at play here. The first is that many producers still have $8/mcf+ hedges that they put on in 2008 (many producers have a rolling 3 year hedging program). This gives then an incentive to keep drilling this year. The second is the need for producers to "drill-to-hold" their leases. A lot of land was leased in 2007 -2008 in the Haynseville, Fayetteville, Barnett and Marcellus shales . . . while producers might have overpaid, these shales have turned out well and are still very valuable. Leases have 3-5 year terms - at which point you lose any leases you haven't drilled. The industry spend around $50 billion leasing land, so it is worth drilling as much as possible until the leases run out over the next 6-18 months. I think this acts as a temporary exit-barrier - but one that will dissapear over the course of 2011. Companies (CHK included) can't afford to stop drilling, because a well that loses $3 million might preserve a $15 million lease. The third factor is that companies are allegedly making money at these prices. I have gone through company presentations and noticed that almost every company is failing to include completion costs (as expensive as drilling), or land costs (varies, but a big factor), or SG&A and interest cost. A couple of recent analyst reports have started to mention this. The only companies that are really earning their cost of capital here are UPL, CHK, SWN, RRC, and maybe ECA and HK, but I doubt it. Others like SD and MCF are definately below the marginal cost of production (probably $6.50), but it just doesn't make sense to drill right now if you don't have to (i.e. don't have rigs expiring or need to show growth to "the street") - This is why SD wisely is dissapointing analysts by not drilling for gas. 2) all of these arguments have been made before, if gas hasn't recovered yet it isn't going to. My response is that there is no clear catalyst, just a confluence of factors and arguments that will send gas higher. Will this be next year, three years from now, or even longer? I can't say for sure. All I know is that owning a low-cost producer of a vital commodity, that is trading well below the cost of production, is difficult to store, has low-barriers to exit for producers, has high decline rates for new wells, is straining current infrastructure, and has political and global tailwinds (shutting down coal plants and exporting LNG) is guaranteed to work out well at some point. $15 natural gas is going to happen sooner or later, and I don't want to miss the 1,000% move in these stocks. Before you dismiss me as a kook, tell me how this is different from the story in oil or potash before those commodities made huge moves and the big producers became ten-baggers in under two years. No one saw that coming either, but in hindsight all the factors were in place. To paraphrase Munger (I think it was Munger), investing is simple but not easy. This is a simple story, but timing is tough. I have paid the price for being a year early to this. At some point it becomes a no-brainer, and I think the money is to be made now, before it becomes obvious. CHK is trading well below liquidation value - and I don't mean that as an abstract concept. CHK could certainly sell its assets right now for more than its enterprise value. Sorry for such a long rant and i'm sure some of this doesn't make sense or numbers are a little bit off, but I think you get the idea and I would love to hear counter-arguments!

If gas was at $15 SD would have no problem turning into a Gas Company. They have both assets and can take advantage of either. CHK is stuck if gas sucks wind for a long time. CHK also has very shady Management. The short on VIC is a good write up and I wouldn't touch CHK when you can get gas for free at Loews (Highmount), for cheap at MCF, or with an oil kicker at SD. All of those will survive 5 years of crappy gas prices. Myth, SD could certainly ramp up their gas production, but after diluting shareholders by over 100% to buy oil assets, I don't think they can suddenly become a gas company any more than Exxon can, despite the fact that both companies have the ability to accelerate their gas production plans. I like MCF, but it is nowhere near as cheap as CHK in my opinion. On an enterprise value basis (to adjust for CHK's debt and preferreds), MCF trades for $2.53 per Mcf of reserves and $8.44/daily Mcf of production. CHK trades at $1.67 per Mcf of reserves and $9.64/daily Mcf of production. While these numbers are similar, CHK has an un-drilled land position that is probably worth as much as their entire current market cap - as valued by major transactions by oil majors. For instance CHK's marcellus shale position is only 5% of their production and 3% of total reserves, but the land is worth $14 billion per recent industry transactions (multi-billion dollar purchases this year by Shell, Mitsui, and Reliance) . . . this is equivelent to CHK's entire market cap. They have similar positions in other shale plays. If you want to say that the gas is free in Loews, I would argue that all of Chesapeake is also free if they just sold of the acreage they aren't currently producing from. MCF will continue to have low finding costs, but not as low as CHK when you take into account the drilling carries paid to them by BP, Statoil, Total, etc.). CHK also has a major oil kicker in the form of huge land positions they have built in 12 oil shale plays. They bought a dominant position in the oil window of the Eagle Ford Shale this year for $1.2 billion dollars. They say that they will sell a stake (likely 20%) within 30 days at a valuation for the total acreage of $6-$7 billion. If this happens, I think it proves that they have a lot of oil, a lot of readily saleable assets that have no reserves or production associated with them, and that Aubrey McClendon produced about $5 Billion of value by being smarter and faster than the competition. I expect CHK to then repeat this with their Niobrara shale . . . if CHK cannot sell this acreage I will go buy a hat and take at least a few bites. Aubrey McClendon had his captive board give him a $100 million dollar bonus (to be his only bonus for 5 years) to bail him out of a personal financial squeze caused by him buying his own stock on margin. He also sold the company his map collection for a few million. This is terrible corporate governance, but not all that much worse than any other company, particularly in the oil and gas industry. This was about $0.15 per share . . . annoying, but not the end of the world. I would argue that McClendon and his captive board are an asset overall (while I certainly don't approve of the compensation practices). . . any other board might have prevented him from buying a big position in the Eagle Ford shale, which I think will contribute billions in value within a month (or at least the contribution will be proven and all the money spent recovered). I think the Niobrara will do the same thing, just as McClendon did with the Marcellus, Haynseville, Fayetteville, Barnett, and Woodford - in each play he spent more than others thought wise, then sold a small stake for a large enough price tag to recover the entire initial investment. He now has 12 oil shales to do this with. CHK management changes their mind a lot and compensates themselves very well, but I wouldn't call them very shady (greedy: yes). They all own a lot of stock, with the exeption of Aubrey McClendon who lost his $3 Billion stake to a margin call. and have built a lot of value - with the most still on the come. I have read the VIC writeup, and I just don't think it adds up. Most of the value in CHK is in the land position and unproved reserves. One can argue that they aren't worth much - as the write-up does - but XOM, Mitsui, Relliance, Shell, Total, Statoil, BP, etc. are putting their money where their mouth is and valuing the acreage at about the same price Aubrey says it is worth. Unlike MCF, CHK has a 10 year + drilling inventory, along with owning over 100 rigs and being almost entirely vertically integrated outside of buying drillpipe. CHK will see very little cost inflation in a rising price environment, while MCF will face competition to pay for new leases and rent rigs every year. I like MCF a lot, I just think that CHK is much cheaper and with more upside. The analysts and investors almost universally hate this company. I think now is a great time to buy.

Sandridge is an oil company (70% oil and 30% gas) . . . If you want natural gas exposure there is no better company than CHK in terms of valuation and upside exposure to the natural gas price (with a caveat that corporate governance leaves a lot to be desired). If you want to buy an oil company with a good amount of low-cost natural gas upside as well as exploration potential, then buy SD I am long both

Thanks Granville!

My mistake Roger, I see it was disclosed at least as early at their June investor meeting

I would expect a sell-side analyst report to mention this later today/tommorow. It is just too big of news, in my opinion, to ignore. Tom said this rock is 300 times more permiable than the Eagle Ford shale, which makes completions much cheaper and improves the economics. I read the original academic research on this play and permiability was an issue, not sure if SD found a better area or has just solved in through frac'ing (they are doing simple 8 stage fracs now in most wells, just acid frac'ing some others) or acid. oil plays like the Eagle Ford Shale oil window sell for $14,000 per acre. I really think this sounds like a reasonable number for this new Sandridge play . . . IF it is contiguous over all their acreage and IF production at their wells declines as expected (while there isn't a lot of info on this specific play, thousands of wells have been drilled in the Mississippian carbonate, so there is enough info to make a good guess. This reminds me a lot of discoveries like the Haynesville (CHK) and Eagle Ford (HK), which panned out as expected. I'm not aware of any major announcements like this by a major company - that has already put 19 wells in the play and is moving rigs there - that didn't pan out. $14k per acre is as big number, but I think realistic. There is a still risk and this should be discounted until there is more information on the wells (which takes time to see how each well declines) and the geography (which takes more wells in different parts of their acreage), but this is really important in my opinion. At $14k per acre this would be worth $3.5 billion or 8.04 per share. I have seen sell-side analysts approach a discovery like this by "risking" it . . . i.e. they might "risk" something like this by assuming 80% of it is worthless (my best guess of what they would do), until it is "de-risked" by further drilling and information. If an analyst "risks" this play at 80% and adds the resultant value (probably still $2.00 per share) to their NAV, I would expect an upgrade. Then again . . . the analysts and I have never seen eye-to-eye

The new play gives very significant new info. They have given details on their Horizontal Mississippian play in Okalahoma. 1) they have 250k acres (we knew this) 2) they have drilled 19 wells and are drilling 4 more right now (new) 3) wells cost $2.5 million and produce 200-400k BOEs, 53% oil and probably some NGLs (new) 4) this play has better rates of return than the permian (new, and as suggested by point 3) 5) "this is a core area for us" - moving 4 permian rigs there right now, 2 more by Q1 (new) Looking at other oil plays, especially frac'ed horizontal plays (they say this is a highly permiable limestone resevoir, not a source-rock or shale, but they still frac most of the wells), I think its safe to assume 20% of all production will come in year 1. If the BOE (53% oil at $70, 47% gas and NGLs at $30) is worth $50, and they are getting 20% of 200-400k bbls in year one, that is between $2 - $4 million in revenue in year one for each well (which only cost $2.5 million). If each well is on 100 acres (my best conservative guess), then you could easily afford to pay $1 million to lease the land for these wells and still make a very attractive rate of return . . . suggesting that 250k acres is worth $2.5 billion. I know $2.5 billion is a large number, but Tom did say "this is a better rate of return play than our permian properties" (which they paid billions for and are smaller), and they are moving rigs their immediately. I think they value could be more than $2.5 billion, but just being conservative, lets assume that only 100k acres of this new play are what they say it is, and the rest is worthless . . . that's still $1 billion in value, or more than $2 per share.

Partner, I couldn't agree more. As I see it, the difference between now and previous "buy points" in FFH ($250 in 2009, $100 in 2006) is that FFH now deserves a bigger multiple to book for the following reasons: 1) FFH is now materially over-reserved, the company has pretty much said so. This means book is understated. 2) The balance sheet is much stronger than it was in 2006 . . . while the balance sheet was strong in 2009, everything else was cheap then too. Right now I think FFH is cheaper compared to other opportunities than it was in 2009 3) Their competitive position has never been better, because of the large organization (currently causing high expense ratios), the worldwide footprint through acquisitions, and the demise of AIG Finally, we are in a soft insurance market and a fairly valued stock market . . . this suggest to me that FFH will have the opportunity to make a lot of money when either of these things change. I think we are going to see their book value grow significantly (in excess of 15% per year) over the next few years, it just might not happen in the next 12 months.

I, along with a number of value investors I have spoken to, share your frustration. Value always trumps in the long term

I like the hotel idea with a buffet and cash bar as it provides more opportunity to mingle with boardmembers as well as a quieter environment for the speakers and better control of timetable, setup, etc. I imagine this would not be significantly more expensive than renting a room of a restaurant, and I would be willing to contribute extra if there are people who would like to attend but are concerned about the cost of this very worthwhile event. I especially think this would be nice for people who would like to come early to mingle, without the contraints of being seated at a table at the restaurant or stuck in a noisy bar.