SupaSage

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    • Fri Jul 4th 08:38 AM
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      Goodrich Petroleum: Gas in the Ground Doesn't Mean Cash in the Bank
      I have to disagree with the author on this one as his analysis is seriously flawed. To properly evaluate GDP, you shouldn't be looking at next year's earnings. In investing in any asset, you should be looking at the present value of future cash flows. And future cash flows are tied to current and future reserves. The author states "Many naïve investors assume that the value of a company’s reserve position (i.e. the value of the estimated oil and gas under the land the company owns or leases) should translate into its market cap." Unfortunately, I think the author is the one who is naive here. To properly assess GDP, you should be looking at its potential NAV. Given the the Haynesville Shale drilling is still in the early innings, you will see analysts continue to de-risk their NAVs (which DO include gatural gas extraction cost assumptions) as additional drilling data is released by any of the 25-35 companies with stakes in the HS. That's what we've been seeing in recent days and what we'll continue to see as time passes. Initial production estimates are gettting bigger and bigger, which in turn, results in more and more reserves per well. More reserves per well results in more future cash flows and earnings. The key word is future here. And although next year is the future, GDP's cash flow from its HS acreage will extend well beyond 2009. So if you want to short GDP, I strongly suggest coming up with a more sound thesis than this author has. Especially when you consider that natural gas industry fundamentals are improving and should result in the tightest supply-demand balance we've seen in years. Short GDP at your own risk. After evaluating GDP's potential, I'd rather be long.
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