JAP1511- It is my thought (but I've been wrong many times before) that some people might be calculating earnings based on 21% ownership of the 2 wells with announced big initial flow rates. However, I htink those wells are not 21% owned and that instead the company owns part of a pool of wells with more wells but less % ownership. I ahve no idea how much ownership or how many wells and is one reason I'm saying be a bit cautious.
Difft things could happen- we could find out the acreage of pooled wells has a much lower % ownership but more wells, maybe a lot of production maybe a little production.
Without knowing specifically how much in error (whether good or bad) the PR.ownership info was/is it seems better safe than sorry.
I'm quite confident the acquisition is going to be very good but still I like clarity and the more wells the harder it will be for me to calculate exact production. Probably won't be able to.
Whereas with just 3 wells and the flow rates required to be published per Texas RRC regs (on a 2 month lag) we could just watch the production on those 3 wells and 'see' if you will what is coming as far as a ballpark figure in earnings. Just take the flow rates monthly, assume a bit more production in the front end vs the back end of the month (so earnings from these wells in the Jan-March timeframe would IMO require a slight decrease factor because of less production later in month but higher prices and more production in front end of month when nat gas prices were slightly lower in general for each of those months).
I had already done the decline rate of the one producing well and used that % decline against the initial flow rates of the 2 wells that came online. Using that decline % per month of the one producing well and applying it to the 2 big producers announced, I figured out 12 months worth of production (on the 2 new wells) using the same decline rate.
Then, as each month's wellhead prices come out I can use those $ amounts and apply it to the 2 new wells that came online but using a slight discount to account for nat gas prices higher in back end of month when prodcution is probably less (I used a 3% expense factor for that).
So we could use the hypothetical decline rate based on the one producer, use it against the new wells to get rough assumption of production, use monthly wellhead prices from EIA (with 3% expense), then calculate rough income from the 2 producers for earnings. Then using the 21% ownership and assuming a 25% interest for landowners (which means the net to MXC would be more like 16.5% or so).
Then with that # multiplied by the 16.5% to get MXC's cut we could apply expenses like 35% fed tax rate (that's what I used), 7% state production tax on nat gas, 10% Depr and Depletion expense (a # I randomly chose but is probably a bit high). Take out those expenses from the #s and I ended up with abotu 13-15 cents per share in net earnings for MXC AFTER expenses. On just the 2 wells.
BUT all that effort (for me an effort cuz I suck at math LOL) was for naught when Tammy mentioned to me they are still trying to get exact clarity on the structure of what they bought. My first reaction was 'what in the world are these guys doing paying the most $ ever for a nat gas purchase and months afterward still not even know what they bought?' and so I subtracted a couple 'points' if you will from my thoughts on valuing the company.
But I then went back and calculated about what I thought an acre of land in that area could be worth and saw they still were way on the cheap side of what that property should be worth in terms of nat gas production so stayed pretty optimistic on the idea of 'pooled' wells on the acreage and not just the 3 wells.
So even though I felt a bit frustrated over not knowing the amount of wells owned or exact %, I know they got a real good deal for the acreage especially since we're talking land that has already been drilled, some is in production, and the royalty interest is free of operating expenses.
So now my thinking is 'OK, we need to see exactly what they have first before getting back to bullish'. That said, I think based on my rough valuation of the acreage (I think it adds a good $5 mill, maybe more now with nat gas prices up, to value of the company but that is just spec on my part) that the company is still relatively cheap longer term.
So if we're talking longer term valuation my thought goes back to why risk $ right now (short term) at these levels if looking long term?
Waiting over a short period of time here for them to get their purchase figured out exactly will add a good amount of clarity IMO to then re-evaluate the comapny when that news comes out (hopefully 100% accurately this time).
So the risks are short term (if you don't own) that we find out the pooled wells could mean even more in terms of value to the company and news clarifies/solidifies that view which sends the stock price even higher, or possibly the stock continues to run becasue of its thin nature and new 52 week highs with nat gas prices still climbing.
The risks (if you own) are that we find out the pooled wells are not as productive as a group as the 2 big wells announced (although those 2 wells are part of the pool of wells so that's good) and that the % ownership is low enough to mean less net to the company overall going forward.
Of course some people may just throw out the shares when/if they find out the original PR was not completely accurate but it isn't like restating earnings so am not terribly worried about that and in fact that might create a buying opportunity.
OK, I need to finish up for the weekend before the Mrs gets up LOL. I wanted to glance over a company (nothing exciting).
I do think MXC will have a shot to report record earnings the next few Qs if nat gas stays up. By that I don't mean higher earnings sequentially necessarily. I mean I think the next 3 Qs will have a chance at being higher than any Q UP TO this point (which is about 20 cents EPS I think) so 3 qs of 20 cents+ per Q. But that depends on nat gas pricee and possible 1 time expenses cropping up.
Good luck! Hopefully we'll all get a good fat chance to load up on this one, but their is some risk it just runs away as you mentioned. Maybe nat gas will correct to give us some chance. It is up about 50% on the year! That has changed my valuation of MXC quite a bit since I first picked it up:)
PS- if AYSI gets bck down to the $1.8s I might actually try to buy some of that back (part of what I already sold).
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