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how to value exploration oil company's?


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If we use magellan, their 10-k says this:


With the results of the CO2-EOR pilot project expected to be received by the end of calendar year 2014, the Company hopes to demonstrate that the implementation of a full-field CO2-EOR program at Poplar could result in the recovery of approximately an additional 50 million barrels of oil. Based on our own work, the production history of the field to date, and reference to analogous CO2-EOR projects in the Williston Basin, management believes that the Charles formation at Poplar has 500 to 600 million barrels of oil in place and the recovery of an incremental 10% of this amount is an achievable objective.

500-600 million barrels implies about 45-55 billion$. 10% of that is 4-5 billion$. If we assume 10% profit margins that is 4-500 million$ of value. For people with more experience, what do you look for here besides taking their word for it.


Market cap is around 100 million I think.

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I happen to be shorting MPET and my position is currently underwater.  (I have not done a lot of research on it.)


In regards to Poplar:

- They didn't pay a lot of money for the property.

- They bought the property from entities affiliated with a former director of the company.

- The 10-K talks about how tax wasn't paid properly and how Magellan paid (for) penalties on unpaid taxes.

- For whatever reason, waterflooding (considered a form of secondary recovery) did not work on the property.  I don't understand EOR that well but this might be a really bad sign for CO2 EOR.  Kinder Morgan's EOR process involves alternating injections of CO2 and water.

- Only 10% of the original oil in place was recovered, so there is something unusual about the property.  Most reservoirs will recover a lot more of the original oil in place.


In regards to MPET:

- Their G&A is really, really high.

- They raised capital recently.

- Their track record doesn't seem to be very good.

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Or another way of looking at it.  Your options are:


1 - Perform due diligence.  You need the engineering expertise and access to data to do this.  I don't believe that there are any oil and gas companies that provide technical data on their properties such as permeability, porosity, pressure, 3-d seismic (if applicable), etc. etc.


2 - Figure out if they are honest and if they have a track record of making accurate estimates.  If so, then maybe you can take their word for it.


There isn't a lot of honesty in oil and gas stocks... let me put it that way.

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ATPG, Gold Group, Baja Mining, Yukon Nevada, and a bunch of other resource stocks are written up on VIC.  Those stocks did not end well.


*I am short Yukon Nevada (now Veris Gold).  I did not short it a few years ago when I recognized that it was awful.


(ALS.TO and the Ken Peak-era MCF are also on VIC.)


So it is probably best to just throw all these things on the too hard pile?

To me, it's kinda crazy to invest in things you can't perform due diligence on and things you can't value.

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  • 1 month later...



so the play on MPET is in the UK?


and there is new management, and they also bought with their own money. share price at 1.90$ now. And the UK shale gas field could be worth almost 4$. And like 0.80$ in residual value. And they also say that almost 4$ could be had from the Australian one with CO2.


But yeah you raise some valid points. I still dont like it enough to buy.

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I thought about shorting them but didn't dig too deeply into them.  There are better shorts out there.


Normally I will want to short an oil and gas company if it satisfies three criteria:

1- SG&A is more than 10% of revenue

2- Retained earnings versus capital raised is abysmal.

3- Cash flow is poor.


XCO "only" satisfies #1 and #2.  (#3 is debatable and hard to figure out.)

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