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Oil stocks chk wll - what is their worth? - stocks-mutual-funds

 

(1) CHK stock price $16. 74, NAV $32. 5

CHK is my darling oil or biological gas stock. Here is rationalized Net Asset Value (NAV) table from CHK July 2004 earning release:

Table CHK PV-10 per share NAV vs Artless gas price

N Gas price NAV per share

$4. 50 $16. 11

$5. 00 $19. 60

$5. 50 $23. 11

$6. 00 $26. 61

$6. 50 $32. 5

PE = 10 or 10% of earning yield is careful acceptable assessment for non-growing business. PV-10 Net Asset Value (NAV) is average answer for value of oil or actual gas aloofness high and mighty flow fabrication cost and expenses. When N gas price = $4. 5, CHK will make $1. 611 per share per year true profit with existing production/exploration expenses. CHK is worth $16. 11 at $4. 5 gas price in this case. We can conceive of that as if CHK is a bank deposit account, the advantage rate is 10%, if we deposit $16. 11 belief there, each year we get 10% appeal income or $1. 611 activity per year.

For the 1st half of 2004, biological gas price was amid $5 and $7 averaging at $6. 0. Accepted gas price was as high as $9 in later half of 2004. CHK stock price is still below $17 a short time ago and its reported monthly net earnings relentlessly under-estimated its true profitability.

* Margin of Protection - CHK

Wall Road analysts have been predicting drastically lower N. gas price or oil price in 2-3 years ahead. Therefore, CHK or the whole oil and gas stocks are trading as if N. gas price concerning $4 - $5 range or oil price connecting $20 - $30 range.

First of all, I be dissimilar that oil or actual gas will go down much from here. Inflation, weak dollar, China and US biting belt-tightening exercise justifies the existing high energy price. Energy price will stay high for quite long term. Wall Avenue analysts are still breathing in past recollection of low oil price in 1990's world. In fact, flow oil price is still at half of price of 1970's peak if we amend inflation from then.

Second of all, even if I am wrong and wall boulevard analysts are right, and artless gas price booming down to $4. 5 or oil price roaring down below $30 in next 2-3 years, CHK contemporary stock price has previously factored in such low energy price (see above table).

Third, the NAV value is a affecting target. Distinctively for CHK, NAV is increasing at 20% to 25% per year recently.

* CHK - NAV development 20% or $3 per share per year

Neither CHK nor WLL pay dividend. They all plow their profit into acquiring or drilling for more oil or gas reserve. Therefore, coldness based NAV adjusted by cash or debt consider true net asset value for the stock. Aloofness based NAV add to per year be a sign of their true earning of business.

CHK NAV value per share has been budding at 20% - 25% per year rate or $3 per share currently. Even if energy stocks carry on to trade at in progress low appraisal to its true earnings, CHK stock price is apt to amplify 20% - 25% come back per year just due to its NAV increase. If Wall Boulevard as a final point acknowledge high energy price as norm in the future, then CHK can reward shareholders even more.

CHK essentially achieved this admirable business act by next measures:

Low cost drilling and fast organic construction growth. Flow area yearly organic construction cyst is 11%. This is one of peak in the industry.

Excellent acquisition track record. Over past few years, CHK has been able to dramatically augment fabrication of acquired acreage in short term so that CHK's acquisitions have been accretive to flow shareholders. Even all the same the most modern acquisition is a little dilutive in per coldness basis, it is predictable to be accretive in cashflow or earning basis. Successful out-performing prevarication program. CHK has been able to find above conscientiousness prevarication prices over past years. CHK is not protected into long term agreement of low prices as many do. For the contemporary accommodate CHK realized a low gas price due to past prevarication so that their earning per share is flat compared to last year. CHK equivocation is light in 2005 or clear of so that privileged price can be anticipated in 2005 or beyond.

(2) WLL stock price $31, NAV $63

WLL is trading at disbelieve even to classified acquisition price and very low multiples to its cashflow. WLL also has very qualified management team with long track best in oil gas business.

WLL reported $63 per share PV-10 NAV at most recent magazine earning report. Presently WLL is trading appreciably below its PV-10 NAV value. In fact, WLL is trading at big cut rate to its peers too. WLL is trading at $1. 32 per Mcfe reserve. The existing be an average of business acquisition price was $1. 5 per Mcfe coolness over past 1. 5 years.

For the 1st half of 2004 WLL generated 18% of annualized come again after replacing all the coldness depletion. The hot acquisition of $44 million acquisition is accretive at $1. 11 Mcfe per cache cost. It is accretive in both cache , cashflow or revenue basis. With more accretive deals like this, WLL NAV augmentation can be 20% per year or more instead.

The hot 2 quarters reported yearly organic construction of only 2%, much lower than estimated 5% - 10% growth. However, creation advance is over-rated carrying out measurement in Wall Street. Most importantly, WLL did not waste any money into over-spending. WLL easily did not spend extra predictable drilling capex. WLL cache substitute drilling cost was still low. From patron point of view, even if WLL fabrication advance is not as good as CHK, WLL NAV can still grow at 18% to 20% per year with smart accretive acquisition and low cost drilling.

(3) Conclusion

I go on to like WLL and CHK. I go on to hold WLL CHK in Blast Patron Real-time Plus model portfolio.

Article by Henry Lu of BlastInvest LLC, a premium investment newsletter publisher in Connecticut. Visit http://www. BlastInvest. com for FREE "how-to" investing assistance, web armed forces and more.


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