I used to use the ‘F’ word a lot. It can be incredibly useful when making a point and, quite frankly, it’s fun to say. But 2020 has been challenging, and in many ways, has defied logic. As such, whenever I even think of the ‘F’ word (Fundamentals) whilst the Federal Reserve is printing money and screaming ‘YOLO’ at the top of their lungs, I wonder when they will matter. That thought scares me. While SEC pricing isn’t the sexiest topic,...

Twitter trolls, valuation methods, and why anyone can do it A discussion about SMOG as a valuation method for oil & gas companies. Part of the O&G Financial Accounting series

The expression "to beat a dead horse" comes from a clever catch-phrase-ologist in the mid 19th century who identified that beating a dead horse would not make it go faster. The only thing more pointless is identifying "Hey, that horse is dead" and not offering an alternative transport solution. Today on Twitter, LinkedIn and the internet, SMOG is the name of that horse. As one industry veteran opined "I have worked as an investor for a decade and I've...

Sometimes I do stupid things and this weekend, I'm going to say that getting into a Twitter debate about CDEV, SMOG and whether or not shale is a viable business falls into the category of stupid. If I closed my eyes and imagined what it must be like to be a politician on the opposite side of the aisle debating someone, I think the conversation I had would be a close proxy. I should know better,...

With all that is going on in Iraq and Iran over the weekend, it would be hard to focus on anything else but that’s exactly what we are going to do (for more on Iran, listen to the 10 minute “Hottakeover Your Commute” podcast, released every Sunday). Hedging!  The boring topic that no management team wants to talk about for fear of taking away levered upside. But first, we must lay out some assumptions: 2020 budget oil price: $55; Royalties:...

“If you can’t explain it simply, you don’t understand it.” Having a character limit helps focus the mind and today, we have a big topic. SMOG. The YE19 SEC WTI price is $55.85. Remember it is calculated on the 1st day of each mo and Jan 1 2019 it was $42.25. The PV10(0) threshold for most inventory in the US requires a higher price. This means that there will be writedowns on a large portion of undeveloped oil reserves. Notably, CVX didn’t mention...

I have an outstanding bet with a peer of mine that the Dec 31 oil price will be $63/bbl. Unfortunately, that doesn’t help the 2019 SMOG price (Mr. Hottake, I was told SMOG is a bad measure!) Well, it’s time to revisit. SMOG is the standardized measure of oil and gas, found in every annual report and summarizes the third party proved reserves using the SEC price (1st D of Mo avg for 12-mo), 5 year PUD rule and 1P curves. It’s not perfect, but...

Cash (flow) is king. House rich, cash poor. Money doesn’t buy happiness but it sure keeps the kids close. F.U Money. I bet you didn’t know it, but all these phrases were originally said by an accountant (an unusually flamboyant one, mind you). As we discussed yesterday, net income is an imaginary number that is the net result of all the revenue and expenses- both cash and non cash. And these items manage the flow on the balance sheet. However, it is the cash flow...

If I was posting for views, I would shut the accounting series down immediately. Perhaps the lack of passion is because even the best accountants on earth can’t change the rock and without good rock, you are ducked. But- without a good understanding of the financials, you can’t invest in a company. So, open your hearts and love an accountant today. The income statement!! A vibrant love affair between cash and non cash items that determines the profitability of the business and the flow between...

Ah, the Balance Sheet! The topic I’ve been waiting 11 months to really dive into. Ok. Not really. But it is extremely important to an oil and gas company. Let’s start with the most important point and work backwards. Don’t use a balance sheet to value a company as many economic assets ARE NOT accounting assets. For example, the largest single asset (most likely) on a balance sheet is the Property, Plant and Equipment. Broadly, this is the AT COST price of wells, plants and...