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Reality Check Needed....

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By Bobwins

Posted: Monday Mar 8 5:35:44PM 2010

In general, I would agree that most energy stocks have had a huge runup. And many are not cashflow positive or barely so. I think some investors are thinking that natural gas was bound to bounce up from the bottom without regard to the actual numbers posted by producers. For the past year, I have stayed away from ngas producers and stuck with oil heavy producers. There is a special category of ngas producers with Cardium oil potential that has really seen their stocks soar. PetroBakken is swooping into the area and purchasing some smaller players to assemble a big position in the Cardium area just like they did in the Bakken. I picked Zapata, ZCO.v, because they are profitable and have a low price to cashflow ratio. In the last reported qtr, Q3, there are very few profitable energy companies in the junior sector. Zapata is one and they have Cardium land besides their regular drilling sites. Success on their first Cardium play should cause a serious rerating of the stock price upwards. Likewise, PetroReef, PER.v, is cashflow positive but has hit an oil well that they think is repeatable. They are guiding for cashflow of .24 for 2010 vs a current share price of .40. They are not producing at that rate now. They need a new sulfur gas facility licensed and built before they can produce their latest oil/gas well and drill others. Low prices have caused distress amongst junior producers. There will be shutin gas production and more bankruptcies and forced marriages. Once all the reserve reports are done and year end financials are posted, the bankers will be arranging a few marriages. However, unlike many times in the past, the financial damage will not cause a major downturn in production. The shale gas area will continue to be developed and keep production at levels that will put a lid on prices. I think ngas will probably sell off once the heating season is gone and inventory starts building again. There is no free lunch and we will soon see what current prices have done to P&L statements for year end 2009 and forward. That should shock investors into reality.

By nachochip

Posted: Monday Mar 8 4:58:30PM 2010

Further to my post, does anyone see any problems on the horizon in regards to the Western Canadian NG industry? I mean, while the financials are not broken out in detail...on production of 2065 BOE...Cinch made 2 million bucks in funds from operations (although I do not know what the working capital changes would be so actual cashflow could be higher or lower)in one quarter. It is looking like NG prices will be low the rest of 2010...I think perhaps investors are being a tad optimistic bidding up energy stocks.

By nachochip

Posted: Monday Mar 8 11:06:19AM 2010

After scanning through another press releases of a gas junior, it puzzles me at the valuations investors are giving Canadian NG producers. Most Canadian NG companies are going to get pummelled this year....recent private placements have in a way hidden how bad 2009 really was to most companies balancesheets. Scan the press releases...alot of companies issued shares and got cashed up. Alot of NG companies were so fortunate that cash is so easy to get from the investment community or that day of heckoning would have happened by mid-2010..instead I think this will be delayed till the fall. Take Cinch Energy as an example. Heavily weighted NG company with good NG production in terms of operating costs. Today they announced funds from operations in Q4 were alittle over 2 million bucks on a NG sale price of 4.56. Really bad, and I am not just picking on Cinch, it shows at 4.56 NG comapnies would have a diffucult time even keeping production flat if they only had cashlow to use for future drilling. The private placements are allowing companies to produce assets that. probably should not be developed this year. Bottom-line, on Nickles it says Alberta NG prices are 4.13 and it is March 8...I think we will see alot of companies who can not attract capital infusions (private placements) go broke this year. Why is the BNN crowd not warning

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