Comparing Oil Juniors
The truth is that I like to use spreadsheets to compare companies in a sector. I have a number of them. One for oil juniors, another for gold producers, another for oil services companies, for trucking companies, and so on and so on.
But please don’t misunderstand me. I am not someone who relies strictly on quantitative analysis, ratios and such, to pick stocks. I always look for the story first. Numbers are a useful tool, but the market is not so rational that you can use them with disregard. I have learned this lesson after having invested in too many undervalued stocks that have continued to remain undervalued for far longer than I have had patience.
What spreadsheets are useful for is understanding how the market is valuing the story when compared to other stories. Stocks with good stories are always going to command premium valuations. Take Arcan as an example of that. Arcan trades at 155K per flowing boe one of the highest of the stocks I follow and one of the highest in the sector I’m sure. But Arcan has a unique land position on a developing play (Beaverhill Lake) that is likely to lead to strong growth and eventually a buyout. You can’t capture that in a spreadsheet and so you would miss the boat if you had only looked at Arcan through the eyes of an accountant.
So what else does this spreadsheet tell us?
Well it tells you just how much you are paying for growth with Second Wave Petroleum (SCS.to). You can’t justify the current price of Second Wave based on their reserves found so far, or their current production. You have to look ahead to their potential in the Beaverhill Lake play and realize you are paying for some of that success in advance.
So does that make it expensive? Well some might say so, but it depends on what that potential success actually becomes. I’ll tell you what, I just read a report explaining the success of Coral Hills (a private oil co also with a sizable land package in BHL that surrounds SCS land and is also a farm-in partner to SCS on some of their land) and the IP’s coming from Coral Hills last couple wells, which basically surround the land owned by Second Wave, have met the expectation of the first boomer well (news release here). Now nothing is a sure thing and it could be that these are small sweet spots and that succes won’t translate to SCS, but I wouldn’t bet on that sort of pessimism. The bottomline to me is its an impressive result and it overrides any concern about the valuation of SCS being too high. I plan to pick up some Second Wave this morning.