Zion Oil & Gas Inc (ZNOG)

[KyOil]

Jryan, yes long term shareholder value is ZN's stated goal, and that is in alignment with what both you and I desire. Lets consider a couple of fund raising paths associated with long term value.

First, assume that a company without revenue who finds a big reservoir will not have cash flow for some amount of time to pay for operations and provide capital.

Therefore, outside financing has to be considered and there are two paths:
A. Borrow funds (debt), or
B. Issue shares (equity).

Both A and B dilute the future value of the shares, but in different ways.

A reduces earnings per share due to interest payments, but with fewer shares outstanding.

B increases the shares outstanding, so the earnings are spread over additional shares, lowering earnings per share.

From a pure accounting standpoint, an optimum point between debt and equity can be found which maximizes earnings per share, which in turn maximizes the price per share.

However, from an operational standpoint the two paths behave very differently. I worked for an S&P 500 company in the computer industry that took on debt to reduce shares which put the dividend payment at risk during a downturn. The company might have done considerably better had it been able to use cash flow to raise the dividend or invest internally. Later, I was in the oil industry and saw first hand the impact on cash flow when oil went from $100/bll to $25/bll. Many players were wiped out due to high interest payments.

So, from an accounting standpoint, I agree that debt issues could maximize earnings per share for a range of scenarios. However, from an operational standpoint I would much prefer to be with a company that grew with equity issues and was debt-free. That company can weather storms with a positive earnings per share.