Quick Quiz

In anticipation of a slow news day as we vote//weigh results and maybe why stocks move and/or don't move, try this quick quiz.

You are an investor. There are only 2 stocks to choose from :- Company A or Company B. Both stocks are priced the same, same amount of stock issued, neither has any debt, and they are in neighbouring townships (remember 640 acres to a section, and 6x6 section is a township) in the same basin ... let say the Montney. So they are roughly equivalent Enterprise Value (EV). Coin toss at this stage, right?

You've been researching and you came across an analyst report that used $20,000 per flowing boepd as a valuation metric.

Both companies simultaneously release their drilling results. The headlines read:
Company A well IP at 1,950 boepd
Company B well IP at 1,650 boepd
Both companies immediately plan to drill 9 more wells. The wells do not decline.

Question 1: Which company do you buy given the information you have at this time. (Why?)
Are you voting machine or weighing machine?


Further information gets released into the market (simultaneously)
Company A well produced 9MMcfpd plus condensate
Company B well produced 4.5MMcfpd plus condensate

Question 2: Now which company do you buy given the information you have at this time. (Why?)
Are you voting machine or weighing machine?


Further information gets released into the market (simultaneously)
Company A claims its a low cost operator at it expects an operating netback of $0.50/Mcf for its gas and $20.00/Bbl for condensate
Company B claims its a low cost operator at it expects an operating netback of $0.50/Mcf for its gas and $20.00/Bbl for condensate

Question 3: Now which company do you buy given the information you have at this time. (Why?)
(If you haven't unpacked your weighing machine, now would be a good time to do so).

Company A:
9MMcfpd = 1,500boepd and therefore in the 1,950 boepd is 450 Bbls of condensate (and therefore 50 Bbls/MMcf is the CGR)
Company A's operating netback per BOE = (9,000Mcf x $0.50/Mcf + 450 Bbls x $20/Bbl) / 1,950Boe = $6.92/BoE

Company B:
4.5MMcfpd = 750boepd and therefore in the 1,650 boepd is 900 Bbls of condensate (and therefore 200 Bbls/MMcf is the CGR)
Company B's operating netback per BOE = (4,500Mcf x $0.50/Mcf + 900 Bbls x $20/Bbl) / 1,650Boe = $12.27/BoE

Are you sure which company you are buying now A or B?


One last piece of information is released into the market
Company A advises the total cost to DCE&T each well is $3M
Company A advises the total cost to DCE&T each well is $4.5M

Question 4: Now which company do you buy given the information you have at this time. (Why?)
So now it's tricky and depends on your objectives
Time taken to recoup DCE&T capital
Company A = $3M / ($6.92/Boe x 1,950boe/d) = 222 days
Company B = $4.5M / ($12,27/Boe x 1,650boe/d) = 222 days
Different perspective. The same result up to this point in time (day 222). After that Company B much more profitable ... but only because we said no decline. What if company B wells decline faster??


Anyone crying foul! Nope. Good. There's a lot more to this activity than headline numbers. A side piece of info in the beginning was that the companies land were in neighbouring townships. That is pretty close yet the results remarkably different .... is that possible. Yes indeed. The play is nowhere near as homogeneous as you may think. A real company's land position. See how "skinny" the transition zone is. That township has all 3 zones of Liquids Rich, Super Rich (transition zone) and Ultra Rich.