Oil & Gas Investing: All The Questions I Ask When Looking At An Oil And Gas Company

8th Nov '11 by Gray Woods

40 comments 21407 reads

Around this time last year, after a number of requests, I posted the top ten questions I asked when looking at an oil and gas company. But earlier in the year, I was asked if I would post up a more comprehensive list. Therefore here is the full list for the questions I normally ask when looking at an oil and gas company. Just to note, I use these on all resource companies, I just change the oil/gas to the relevant resource. Taking diamonds for example (measured in carats per tonne): P90 = Reserves/Probable, P50 = Indicated Resources, and P10 = Inferred Resources. You also have to take into account JORC compliant, and non-JORC compliant; Russian C1, C2, etc, and others. But that is not for this article. Getting back on track, here are the main questions I ask:

1) Do they have reserves, resources or a mixture of both? Reserves are the most valuable, Contingent the second most, and Prospective the least. If they have reserves:

a) How many 1P/P90 and 2P/P50 do they have?

b) Do they have any 3P/P10?

If they have resources:

a) What is the low estimate, median estimate, and high estimate of the recoverable resources, or the OIP/GIP (Oil/Gas in place) numbers?

2) What is their exploration upside? And what are the odds of success?

3) Is the prospect conventional or unconventional? Conventional is lower cost and less risk.

4) What is the oils API rating? This is imperative when working out the worth of an oil field as it dictates the likely sale price that they will be able to attain for the oil. An API of <10 is extra heavy, 10-25 is heavy, 25-30 is medium heavy, 30-40 is intermediate, 40-50 is light, and anything above 50 is extra light. Most oil fields are intermediate (though some like to call their crude light anyway like Saudi Arabia), with the two bench mark oil prices -- Brent Crude and Western Texas Intermediate (WTI) -- being intermediate. This means that anything lower than a 30 API will require a discount from the oil price. For an API of 14, discounts can start high as 20-25% before dropping down, whilst some can be as low as 5-7%. It is totally dependent on how the refineries rate the quality of the oil, also, how strong the demand for oil is at current.

5) What is…

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sirlurkalot

9th Nov '11

I wish. LadyL would like to point out that I had to check with her what those muscles were even called before I posted my last one here....

To be fair to Gray, he's much closer to Having It All (ie both investment expertise and great abs) than almost anyone else around here.

emptyend

having met SirL in the flesh, I can indeed confirm that he is himself a 25yr old model with great abs

I'm sure that SirL would deny ever having had dross like ABS anywhere near his personal portfolio. And he is certainly nearer 25 than I am.

In contrast EE is a retired sumo wrestler who has taken up ballet in his declining years

Yes indeed. Its a good job you found a photo of my better side, otherwise I'd be looking a little portly...

;-)

In all seriousness, SirL is right to say

....though my two gym enthusiast sons of similar age would doubtless take issue with the abs and are both deluded enough to think that it is they who have it all!. We all have to start somewhere in investment and, these days, arguably its as well to start in public. But the advice in post 15 remains good advice.

snickers

just moving back on-topic here, if i may..

point 14, about the shares in issue.. do any seasoned regulars have a gut [or abdominal muscle] feeling when considering this number? a company surely pitches itself at a certain target audience when it decides to issue 100m shares at 5p rather than 1m at £5..
or is that my own hubris thinking that small private investors do much to influence a company valuation, in general..

it's good to put your conclusions out, to get them shot at: it produces lessons just as quick and cold-sweat-inducing as putting your money out there..

..and a little knowledge is a dangerous thing, especially with natural resources compnaies which offer this promise of analyse-ability.

marben100

Personally, I don't care how many shares a company has in issue. What I care more about is how its market cap compares to what I consider the value of its assets to be. However... a small market cap. and large number of shares in issue, might prompt you to check the company's issuance history. The need for repeated placings, without generating results, is a warning sign.

Concerning checklists, just about the most important one for natural resources companies IME is quality/integrity of the management. All the reserves/prospects figures in the world are pretty meaningless unless you can be confident that they are prudent and realistic. Unfortunately making a judgement on management quaity/integrity is very hard and can only come with considerable experience (and even the most experienced investors can get it wrong from tiime to tme). I hope I've learnt a bit from my past mistakes. One tip is to check management's track record.

At a presentation about a year ago, I listened to management of a small US based and PLUS quoted company extoll the virtues of their acreage. Based on what I heard (or, rather, what I didn't), I just had one question for them after the presentation: had anyone on the Board ever previously been involved in drilling an oil well? The answer, "no", told me all I needed to know. Exploring for oil is hard. Good acreage is not easy to come by at cheap prices. Experience counts for a lot and mistakes can be very expensive.

OTOH, one of the big attractions for me about about Encore (and what the figures hid) was that the management was very experienced and very conservative. When a figure couldn't be put on something they simply refused to speculate about what it might be. Hence a couple of years ago, their prospects might not have looked all that great. It was only by listening to their presentations in detail that one could realise that a) downside risk to your invetsment was low because capital commitments were small and the (trustworthy) management had indicated an intent to return cash to shareholders if the their CAPEX programme didn't produce the desired results; b) there was a chance that those prospects could be signfificant relative to the firm's market cap. So, when the shares traded below the cash value of the company they seemed like an excellent asymmetric bet to me: little downside risk and plenty of upside potential, as I explained here. However, that bet could only be made on the basis that you were confident that management would do what they said they were going to do, which is not necessarily the case for all companies.

Best,

Mark

Gray Woods

To start... this was not the debate I was expecting... and I fail to see how what I do in my spare time really has any inflence on this... and there is a lot I could rise to, but do not want to waste peoples time, so I will say nothing more on that... Also I will update my about me on this site since it seems to matter so much...

Personally, I don't care how many shares a company has in issue. What I care more about is how its market cap compares to what I consider the value of its assets to be. However... a small market cap. and large number of shares in issue, might prompt you to check the company's issuance history. The need for repeated placings, without generating results, is a warning sign.

Thanks for stating that Marben, that is the point I was trying to get across, just a simple factor that may catch the eye in certain cases.

Murakami, it's no trouble about the article name, I do not mind really, if you feel you can give an article a more appropriate title, or a title which may benefit the site, then go for it. Though this seems to have stemmed some interesting debate... In terms of a O&P stockfilter, I agree it may be hard to create one. You could try putting a survey out there, asking if people would find it of use, and what sort of information and results people would want from it (Apologies if you have already done this), get a strong consensus. For example, a basic one to use as a starting point to wittle companies down may be of use to save time, like if people are looking for high risk companies in a certain location, only want to look at producers, ones with a certain amount of reserves, in a certain location etc.

Tournesol, I respect what you say, and if people have got the wrong view of me, that was not my intention, and I thank you for what you have said. But I have just a few points that I feel after what has been said throughout that I need to address.

"...I have been asked many times what I look for in an oil and gas company, and the types of questions that I like answers to before I will invest in it....". Frankly that just looks ridiculous when read in context with your personal profile as referenced by SirL.

That was posted on my blog, and was in context to a number of requests I had from friends and collegues, and from posters on my blog, therefore has no relation to it being posted here. It was posted here for the reason stated, but to elaborate a little more, I had several messages on my site asking if I had a comprehensive list, but rather than direct them to my blog -- which I do not use anymore and is where the post orginated from -- I posted it here, as my site can be troublesome to view at times due to its current ISP, only working on an on off basis. In terms of the smoke screen, I have never stated anywhere that I was doing anything other than detailing my progress, and my findings in the investment world. And from what you have found about me, I think that confirms this. But here is the about me on my blog to clear up who I am...

My name is David Graham Ward. I have been interested in the markets since I was a child, and owned my first stock in my teens. I have followed the markets since 2002, when I was sixteen, and I have been a private investor since late 2008. This site details my progress, research, and everything that I have found of benefit to me i.e. things that I feel are hard to come by, but of which I feel of great use to any private investor.

My Credentials
I graduated from Northumbria University with a first BA Honours degree in Finance and Investment management. But it was not until I left that I really found my own investment philosophy. Due to a wrist injury I was able to take the time to study Warren Buffet and the great Benjamin Graham. Finding that Warren Buffet had taken Benjamin Graham's idealism -- Value Investing -- and tailored it to whatever market place he was in. This idea I took myself, and began using Benjamin Graham's value investing on the UK market, twisting in a way that allowed me to get a feel for it in the highly volatile current market conditions -- so far to great success (Touch wood...). One final philosophy that I took on was that of Philip. A. Fisher. His deep qualitative investment analysis I feel was the final piece in helping me to truly gain a grasp of my own investment philosophy.

Investment Return:

2008: FTSE Allshare = -11.05%, Grays Stocks to Watch = 11.85% (Last three months only)
2009: FTSE Allshare = 24.96%, Grays Stocks to Watch = 98.64%
(http://grayshares.co.uk/graysinvestmentbloguk/2009/12/31/grays-stocks-to-watch-2009/)
2010: FTSE Allshare = 13.57%, Grays Stocks to Watch = 111.37%
(http://grayshares.co.uk/graysinvestmentbloguk/2011/01/01/grays-stocks-to-watch-review-2010/)

*Combined three year total 397.5% or if £100,000 was invested in 2008, it would now be worth £497,540.

Other points of note about me

I have worked for NICO, done promo work, and manage a portfolio. Also, I am very interested in the arts and creative world, which I focus largely on in my spare time.

EE. I believe the above is self promotion... :)

Finally, just for fun...

It's like me offering my ideas on team selection to Sir Alex Ferguson.

I probably will not endear myself by saying this, but Warren Buffet would have to post here for that to be true...

Can I just say as well, can we please leave it at that, as a discussion like this has no place here, if people would like to discuss me (I'm honoured by the way, especially sirlurkalot's comment...), create a thread... if not, please keep on topic, criticise what I have written, praise it, add to it, even create your own points (EE, from your strong opinions and history, I'm sure many people would be interested to know what type of things catch your eye in a O&G company), otherwise do not post it, as I'm sure people have better things to do (me included) than read a debate about me...

10th Nov '11

Concerning checklists, just about the most important one for natural resources companies IME is quality/integrity of the management. All the reserves/prospects figures in the world are pretty meaningless unless you can be confident that they are prudent and realistic. Unfortunately making a judgement on management quaity/integrity is very hard and can only come with considerable experience (and even the most experienced investors can get it wrong from tiime to tme). I hope I've learnt a bit from my past mistakes. One tip is to check management's track record.

I would completely agree with that. There are few companies that succeed without it. However, that isn't a sufficient criterion for success......in the world of E&P what is more relevant is to recall the famous response of Napoleon when he was asked if he preferred courageous generals or brilliant generals:

Neither. I prefer lucky generals.

I have known good quality managements with high integrity who haven't (yet) produced much by way of results. I have also known some good managements be disregarded due to a perceived lack of growth catalysts. And I have known some managements that I would regard as less trustworthy who have appeared to produce great results for shareholders through the drillbit.

So - do not overlook the impact of pure luck in these matters. For example, Cove had a highly capable management team - but nobody knew until Ironclad was drilled that their acreage in the Rovuma basin held what is now looking like a world-class gas resource. OTOH, Encore and Gulf Keystone both had somewhat chequered records (albeit with rather different management team characteristics) before they made a big strike.

The absolute bottom line is that there is no substitute for having the right acreage - and then successfully drilling it. And it doesn't matter HOW good a management is - if they have the wrong acreage they won't produce hydrocarbons.

So - in answer to Gray's question there are three things I look for:

Good management, good prospective acreage and acceptably-priced political risk.

Most of the rest is simply over-analysis in a business where luck plays a big part. As I said in post 7, unknowns account for something like 80% of the results......they can be good unknowns or bad unknowns - but if a company has good management and is drilling in the right place (both geologically and politically) then the chances of good unknowns are higher. But nothing is certain.......and even the best managements can fail to produce results for some while, often through no fault of their own.

FWIW

Cuthbert C

EE

hear hear - totally agree

I have often been amused/baffled/puzzled by people arguing that a company which has enjoyed a string of drilling successes (eg Tullow, Coastal) must be in possession of a better quality of exploration team then another company which has achieved fewer drilling successes. Truth is that the best explorationist in the world can't find oil if there isn't any to be found.

Picking up in the lucky general idea, another vital factor is timing. Dana correctly identified the massive potential of Ghana years before the recent spectacular run of drilling success enjoyed by Tullow et al. But they were unlucky in their timing. They were too early, too far ahead of the market. Their own position in their evolutionary cycle had not yet provided them with the muscle to go it alone regardless of the degree of conviction they might have had. The overall sector cycle had not yet reached a point where other E&P's had enough muscle to take up the opportunity to farm in to a frontier province. Majors were not yet prepared to involve themselves in outside chance wildcat acreage. The oil price had not yet exhibited enough strength to be a compelling factor. Dana could not afford to go it alone and could not find farm-in partners. It wasn't for lack of trying/ Remember them signing a worldwide collaboration deal with Woodside and opening their exploration data library for their review. Woodside looked, sniffed dismissively and turned away. Dana was stretched between Mauritania where oil had already been discovered and where other oil cos were already active and interested - and Ghana where the potential was still unrecognised by everybody but them. They made a decision to drop one in favour of the other. From the perspective of rational, scientific, logical management decision making, they did the right thing. With the benefit of hindsight, they did the wrong thing.

Unlucky/unfortunate timing was the deciding factor in the demise of Genesis and of Plectrum and who knows how many other small E&P's. They needed to raise money at a point in the market cycle when that was impossible. So they folded. At present there are several small early-stage E&P's that are of significant interest to me: DEO; Bayfield; IGAS; TRAP. I have holdings in the first 2 of these.

DEO has excellent acreage but is in the uncomfortable situation of needing to raise working capital in the short term. Since its modest IPO. It has been pounded by the markets and the SP has taken a beating. I happen to think that the investors who supported the IPO will be ready to inject additional funds - but I'm not 100% sure of that. That being the case I have held back from topping up. I'll wait and see what happens. When the way forward looks clear, I'll certainly be buying more.

Bayfield has enough cash for short term needs and is already in production. I think their IPO was well timed and well sized. Their SP has held steady at IPO levels but that may simply be because of their low profile having led to them escaping the attention of retail investors.

IGAS has enjoyed such a low profile it has been all but invisible (which is why I asked Gray how he became interested). They appear to have timed their recent acquisition very astutely. If they can continue without short term fund raising they look very well placed. Their shares are currently suspended pending finalisation of the acquisition/merger terms. That seems a lucky accident since it is sheltering them from market pressure and allowing them time to promote themselves to compensate for any market weakness.

TRAP looks very interesting but I fear it might be the victim of unfortunate timing. I can't imagine they can make much progress without a substantial fund raisng and that looks like a hard task in present circumstances. When things become clearer I'd be interested in buying but only after I can see the way forward.

And reverting to the point made by previous posters about management. My interest in 3 of these 4 companies arose from direct knowledge/experience of the management teams and their previous achievements. DEO management are ex-Oilexco. Bayfield are ex-Burren. IGAS was founded by an ex-Hess man, Francis Gugen. I am a firm beleiver in the proposition that what you say about yourself is of little significance compared to what your achievements say about you. In these three cases I was able to consider the achievements of the pre-decessor companies and of the indiviual managers within them. In my view that mitigates risk very significantly.

So - a few questions arising

who is in the management team?

where have they come from?

what have they done?

was their previous success/failure due to luck or skill/competence or the lack thereof?

does the organisational structure/hierarchy look right?

are there appropriate organisational checks and balances?

is remuneration proportionate?

do management have significant shareholdings of their own?

are the exploration assets located somewhere at an auspicious point in the development lifecycle - ie not too early, not too late

will farm-in partners be hard to find?

has the company got enough cash to get through market turbulence

etc

ee,

We agree that "pure luck...plays a big part" in E&P investing, and "unknowns can account for something like 80% of the results" which makes analysis unreliable. Given this, wouldn't it be wiser to diversify a portfolio over more smaller holdings to have more smaller chances? If you're concentrated, a few bits of bad luck can hit you badly: if you're diversified, won't luck even up soon enough?

which is why I asked Gray how he became interested

Apologies Tournosol, I got so distracted by other posts I forgot you asked that. I got into IGas Energy (LON:IGAS) for three main reasons: the high calibre of the management team, who were all heavily invested at the time; the what I felt massive potential of their acreage, and the continued success of their testing programmes. At the time also, they were very off the radar, meaning they were priced quite low considering the strength of their balance sheet, and the as I said continued success of their testing programme at the time. Unfortunitely though the business has vastily improved its prospects through mergers and acquistions, the price has not really improved much. Going to the management discusion, this, from my experience, can be a downside for companies where management are heavily invested, they are more focused on the business than the share price (Frontier Mining (LON:FML) is another example of this). So still a good long term investment in my view, but not short, as has been proven by the lagging share price over the last couple of years.

wouldn't it be wiser to diversify a portfolio over more smaller holdings to have more smaller chances? If you're concentrated, a few bits of bad luck can hit you badly: if you're diversified, won't luck even up soon enough?

Yes this is true. More shareholdings would dilute the impact of bad luck. They would also dilute the impact of good luck.

Picking up in the lucky general idea, another vital factor is timing. Dana correctly identified the massive potential of Ghana years before the recent spectacular run of drilling success enjoyed by Tullow et al. But they were unlucky in their timing. They were too early, too far ahead of the market. Their own position in their evolutionary cycle had not yet provided them with the muscle to go it alone regardless of the degree of conviction they might have had. The overall sector cycle had not yet reached a point where other E&P's had enough muscle to take up the opportunity to farm in to a frontier province. Majors were not yet prepared to involve themselves in outside chance wildcat acreage. The oil price had not yet exhibited enough strength to be a compelling factor. Dana could not afford to go it alone and could not find farm-in partners. It wasn't for lack of trying/ Remember them signing a worldwide collaboration deal with Woodside and opening their exploration data library for their review. Woodside looked, sniffed dismissively and turned away.

Yes indeed. This was one example I had firmly in mind when talking about luck. The rewards in this business don't always accrue to the first....one needs to be lucky in timing too.

Unlucky/unfortunate timing was the deciding factor in the demise of Genesis and of Plectrum and who knows how many other small E&P's. They needed to raise money at a point in the market cycle when that was impossible. So they folded.

This is another good example of luck. Even companies that survive such market funding droughts can find themselves being pilloried by shareholders for having diluted them at a cheap price - even when the share price fall had little to do with management failings and a great deal to do with factors beyond their control!

You go on to mention a point about partners. I would say that partner issues are one of the most difficult for an E&P company to deal with. For example, partners which are small or cash-strapped may have trouble paying their share (and may therefore vote against drilling at such times); OTOH partners that are large are likely to want to operate and may come with a "big company cost base" .....and even then the particular project may not make it through capital allocation committees or may be sidelined due to other larger prospects in the portfolio demanding resources.....so one needs to be lucky with partners too - at least until there is a big enough discovery to align everyone's interests!

Fangorn

It is indeed a fine line.....

The more knowledgeable Oilies E&P'ers amongst us probably choose to concentrate their portfolios I expect. Us relative novices take the more diversified approach - I know I do!

In most of my investments I tend to focus on

1)Oil proven regions eg North Sea / Kurdistan/Iraq/Colombia(Only recently come across this)

2) Companies with actual production or near term production or a mixture of base line production + high impact explo

3) Management that seem to know what they're doing.

But I'm not adverse to taking a punt where potential high impact explo is concerned in a new unproven zone, or one that is relatively undiscovered but a find or two has been made....eg East Africa

Hence my main Oilie investments centre on EO, NPE, FPM, SIA, BP,RDSB, GKP, HOIL with a smidgeon of smallies, such as Aex,AST, LGO, RRL., Deo and GBP.

Soon of course to add some Canadian and Colombian Oilies :)

"More shareholdings would dilute the impact of bad luck. They would also dilute the impact of good luck"

Yes indeed, if you're at the stage of life of taking speculative risks in order seriously to build up capital in a risky way. I'm genuinely surprised that you, ee, who are no longer in the first flush of youth, choose to have AIUI some 70% of your capital in the shares of a single E&P company, given how important we agree simple luck is in the outcome in this industry. Shouldn't you be aiming more for a steady return than for speculative risk taking?

Going back to the original issue raised in the thread header, I'd strongly recommend Gray and anyone else interested in oil co investment to attend as many AGM's as they can manage. Those where private investors turn up in force (Soco, Encore, etc etc ) are particularly useful.

Also worth attending OilBarrel if sensible companies are presenting - not always the case these days alas

Also worth attending Fool socials - not all in London

And Mello get togethers

I can honestly say that I have never left any of the above without a better insight into an investment opportunity or two and a better understanding of the views of other investors.

And I can honestly say I have made quite a lot of money as a result.

In terms of learning & research I have several times found myself the only shareholder at an AGM and have ended up getting a personal tutorial from the management team - that kind of thing is worth its weight in gold.

T

Another question for a checklist

What is the co's approach to communicating with shareholders?

How full is their disclosure?

How pro-active is their communication?

How transparent are they wrt their plans and projects?

I am an ardent practitioner of the technique described by Malcolm Gladwell in his book "Blink" whereby someone who knows a lot about a subject can isolate a small number of critical facts and extrapolate from them to get a reliable handle on a complex situation. (This is the exact antithesis of the exhaustive checklist approach espoused in the thread header). In the case of Coastal, I judged their shareholder communication to be best in class after about 5 minutes looking at it. I estimate that simple observation weighted about 33% in my decision to make a substantial investment in them. The other factors were 1) management competence and integrity - which I judged largely on an oil barrel presentation supported by a little research and 2) quality of acreage - ditto. Total research time about 1 or 2 hours. Result - pretty satisfactory.

T

choose to have AIUI some 70% of your capital in the shares of a single E&P company, given how important we agree simple luck is in the outcome in this industry.

My perception of that particular company has always differed from analysts and the market (save for 2 days in 2007) - though even they now seem to believe that the company concerned is far too dull, there is no material drilling (for which luck might be required) and no material upside....and are pricing it accordingly.

I'm certain you take little notice of anyone's advice, so you'll understand that I don't either.

..someone who knows a lot about a subject can isolate a small number of critical facts and extrapolate from them to get a reliable handle on a complex situation..

..the subject may well include the people who post on bulletin boards. & so i think this discussion can move easily into behavioural psychology - even using stock screens can't allow you to escape irrationality. an article in vanity fair by michael lewis, a review of Daniel Kahneman 'Thinking, Fast and Slow', might interest..

...describes what appear to be permanent kinks in human reason. The story he tells has two characters—he names them “System 1” and “System 2”—that stand in for our two different mental operations. System 1 (fast thinking) is the mental state in which you probably drive a car or buy groceries. It relies heavily on intuition and is amazingly capable of misleading and also of being misled. The slow-thinking System 2 is the mental state that understands how System 1 might be misled and steps in to try to prevent it from happening. The most important quality of System 2 is that it is lazy; the most important quality of System 1 is that it can’t be turned off. We pass through this life on the receiving end of a steady signal of partially reliable information that we only occasionally, and under duress, evaluate thoroughly. ..

make that awareness item 1 on the checklist.

davjo

One point I don't think has been covered is that of management relationships with government. These can be important in gaining access to highly prospective acreage and negotiating preferential terms. This can be particularly beneficial in those more politically risky regions, notably Africa and the like.

Re NPVs, I'm sure professional analysts will have access to proprietory DCF software programmes for all oil producing regions around the world, from which they can arrive at a value. Of course, whilst the software might be mostly reliable, the figures pumped in may not. As to the reliability issue, somewhere like the N.Sea or US, should be cast iron in that fiscal terms are in the public domain. Places like Vietnam will have a mixture of contracts, many with different terms, some being true PSCs and some not, so it takes quite a bit of investigation to get a true understanding, that usually being dependent on the company being helpful in enquiries. I did construct a DCF model for Soco Vietnam a few years ago which I think remains pretty valid. However, there will be question marks over some finer points of peripheral taxes which may change over time, so it will never be perfect...just a guidance.

repobear

11th Nov '11

I've got to agree with SirL here. As someone who has had too many eggs in too few baskets and experienced the ups and downs that such a strategy brings, I recognise that SIrL makes a telling point. There again I've never tried to pretend that success in an E&P business is largely down to luck. To say that and have such a large percentage of your portfolio in one share beggars belief, imv.

There is a strong element of luck involved in achieving success in oil exploration and production, but it requires key skills, both technical and commercial, to ensure that a company gets enough rolls of the die to get 'lucky'. This involves acquiring the right acreage, getting others to pay a disproportionately high percentage of the exploration costs and sizing investments to stay in the game until you hit the company maker. Technical capability is not to be underestimated and anyone who believes that firms which constantly screw up on these matters are unlucky is kidding themselves, I'm afraid. Is there a correlation between wells which get drilled quickly and without too many problems and exploration success, and vice versa?

Financing is a key skill because capital markets shut down at times and if you run out of cash at the wrong time you're screwed. You'll most likely go bust or either sell something cheaply to stay in the game or sell something cheaply to return less cash to shareholders than you might otherwise have done.

The key skill for investors is getting enough rolls of the die to get lucky. Sizing positions is clearly important here, but so is getting the chance to be lucky, without paying much for it. See the link that marben provided above. If you do that enough as an investor, with companies whose interests are more aligned with yours and with managements, that are technically and commercially capable, you have a chance of getting lucky.

Antrim Energy appears to have enough of the key ingredients to have a very decent chance of getting very lucky. If you can find a couple of those every year, over five years you have every chance of getting above average returns, even in a business where 80-90% either fail, or stay in business without benefitting the shareholders.

repo

Re NPVs, I'm sure professional analysts will have access to proprietory DCF software programmes for all oil producing regions around the world, from which they can arrive at a value. Of course, whilst the software might be mostly reliable, the figures pumped in may not. As to the reliability issue, somewhere like the N.Sea or US, should be cast iron in that fiscal terms are in the public domain.

I'm far from sure that is the case. I strongly suspect that many of them use DCF programmes that were constructed for the North Sea (or US) - and which may not be adaptable to every other tax situation. Faced with a shortage of time and the choice of using an imperfect model or building their own DCF model for a single company, I'd guess that many of them consciously use the imperfect model. That won't always be the case of course, but it is likely to be true the further one goes down the analyst food-chain.

Oil & Gas Investing: all the questions I ask when looking at an Oil and Gas company

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Gray Woods

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