Model Portfolio teriksen:ESVF

When analyzing an oil and gas company there are a number of metrics to look at: cash flow, earnings, production growth, reserves, finding costs, and PV-10 figures, are the most important. I am not going to go through all of them in detail, but you want to find a company that is attractive based on all not just some of the factors.

Swift does not have any hedges in place, thus it will capture all the benefits of the current rise in oil and gas prices. I estimate cash flow at over $15 per share for 2008, EPS of $7.85 per share, based on oil trending down to $90 by year end, and natural gas dipping to $8 per mcf in the summer before rebounding to $10 at the end of the year. (Those are not my actual predictions of what will happen, I just try to be somewhat conservative to keep a margin of error/safety.)

PV-10 was $85 per share as of December 2007 based on prices of about $93 per bbl and $6 per mcf for oil and gas, respectively. Oil reserves are 10 times last years’ production levels, while gas reserves are at 17 times. In other words at current levels they have 10 years worth of oil and 17 years worth of gas, which is very good. Production is stable.

Wall Street has slowly been increasing estimates for the company, but is still far behind in my opinion. The street has Q2 at $1.83 and the year at $7.36. I see Q2 at $2.35 and the year at $7.85 based on my oil prices falling to $90 by year end. If oil pulls back to $110 per bbl and stabilizes then 2008 EPS should be about $8.65 per share.

At $58 per share it is just over 7 times my estimate of earnings. If oil prices rise I should do very well since they are not hedged. If oil falls a bit, the low valuation should still result in a modest profit. If oil falls precipitously? Well I probably will lose a bit. Hopefully, I will see it coming and sell, if not at least I will quit complaining when I fill up the car with gas.