ERHE’s reserves are burdened with a 50% tax. It does not make sense to claim that these reserves have the exact same value as those burdened by a lower tax rate. This higher tax rate has some effect on the amount of actual reserves booked as proven because it reduces the amount of oil that can be produced economically. But it has an even bigger effect on the value you can place on those reserves because of the lower resulting cash flow due to the tax. It makes no sense to say that reserves encumbered by a 50% tax rate have a value of $15 per bbl and those encumbered by a 20% tax rate have the same value. Both can be produced economically, but both don’t have the same value. You simply have to make that value adjustment somewhere. And if you are not going to do it by further reducing the actual proven reserves as I’ve advocated, you have to do it by reducing the value attributable to those bbls. All else being equal, reserves encumbered by a 50% tax rate have to be worth a lot less than those encumbered with a 20% rate. That is where I differ on valuation with some here.
Another issue which must be addressed is the 14 billion bbls of proven reserves. I’ve seen that number thrown out again and again. That is a HUGE number for an area the size of the JDZ. It is by no means a given. That amount of reserves is equivalent to the total proved reserves of some of the largest oil companies in the world. Exxon has about 27 billion, BP 17 billion, Shell 12 billion, Conoco 11 billion, Chevron 11 billion. Can that much oil really be proven in an area the size of the JDZ? That remains to be seen and is by no means a given.
There is also some question about whether the 14 billion refers to proven reserves or if it refers to something else. Remember that proven reserves are P90. That probably means you have to find a lot more than 14 billion bbls to get 14 billion of proven. You have to be very careful because often numbers like that 14 billion do not refer to P90. Sometimes these numbers aren’t even cut back by the recovery factor.
I have seen many HUGE numbers thrown out for valuations for ERHE. I have to question those numbers. While I believe ERHE is an excellent investment and will pay off nicely from its current stock price, I do not believe it will achieve over $50 billion in market cap or an $80 share price. Those numbers are unrealistic IMO.
