In the past year you may have come across some videos on the Web where two animated creatures (looking a bit like Hello Kitty) talk about everything from dueling cell phone platforms to the soul-crushing reality of journalism.
Naturally, folks in the energy industry have taken a notice, with one unknown author posting a piece on the enigma of investing in oil and gas exploration firms.
The view on E&P investing is somewhat bearish, however.
The discussion — between an investor wanting to buy some E&P stocks and an experienced investor — essentially casts doubt on the sustainability of the companies (presumably onshore natural gas drillers). In short, the experienced investor says that the companies don’t actually make money on production but rather increase their net asset value by doing more and more drilling, regardless of the costs of acquiring acreage.
“Why does the cost of acreage not matter?” the newbie asks.
“Because investors will pay for the acreage, and all the company has to do is drill the highly profitable wells,” the old hand replies.
“So as long as investors keep funding companies with equity and debt they can continue to drill high return wells that do not make money but create upside to NAV?” the newbie asks.
“Now you understand perfectly,” the other responds.
Does the thesis sound familiar? It should if you’ve followed the work of Art Berman.