Monday, July 21, 2008 1:30:38 PM
The other method is to look at the market cap of some companies as compared to their proven reserves. I like to use the midtier oil companies for that exercise. The small ones are too unpredictable and Big Oil has too many other lines of business such as refining, retailing and chemical.
Two companies I like to use are Noble Energy(NBL) and Anadarko(APC). Noble has a market cap of $14 billion with reserves of about 880 million bbls. That equates to about $16 per bbl. Anadarko has about 30 billion in market cap and about 2.4 billion in reserves. That equates to about $12.50 per bbl. So I would say $15 is a good compromise value.
I would also say that proving reserves is not as easy an exercise as some think. If ERHE drills six wells on six different prospects and hits oil on every one of them they may still not prove up a single bbl of reserves. It generally takes 2 wells within a single prospect to prove reserves.
I would also caution people about the difficulty of amassing a billion bbls in reserves. That may happen but I don't think its likely to happen in just a couple of years.
Having said that, I think the share price will not be based on proven reserves in this interim stage between drilling initial wells and proving reserves. It will be based on the initial well tests for these wells and people will guesstimate what proven reserves could be in the future. Proven reserves could be a ways off but that doesn't mean a rise in share price will be.
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