March 25, 2002; Small Cap Natural Gas Producers Realign on Stronger
The valuation of independent producers has gotten a
lot better in a short time. In early December, XTO Energy was valued at an
Enterprise Value/Ebitda ratio of 8.9 times and the stock was $16.25 per share
(see Meter Reader, December 3, 2001).
Now the EV/Ebitda ratio is 6.6 times on our estimates and the stock is
$19.70. Our present value of
equity, also known as net asset value, was $19 then and is $26 now.
A favorable year-end reserve report also helped our numbers for XTO.
Thus even though the stock price is up, the statistical attraction is
greater (see Stock Idea, XTO Energy).
If this is a good time to invest in our recommended
small cap producers is it probably also a good time to invest in peer companies.
Continuing favorable operating progress and high commodity price enhance
the attractiveness of oil producer Encore
Acquisition Corp. (EAC) at a McDep Ratio of 0.77 and a ratio of debt at a
low 0.18 (see Table S-1, S-2). The
Chairman of the company had chief responsibility for creating the three royalty
trusts that we cover in detail with weekly changes in estimates.
We add Unit
Corporation (UNT) to our coverage at a low McDep Ratio of 0.83 and a ratio of debt at a
low 0.03 after attending a presentation last week by Mr. John Nikkel, Chief
Executive Officer. Since we first
met Mr. Nikkel about 20 years ago he has steadily compiled a winning record as a
driller and producer of natural gas starting in Oklahoma and branching out from
A fallen favorite, Southwestern Energy, appears to be progressing well as it rebuilds under the
direction of a new leader, Mr. Harold Korell.
The McDep Ratio at 0.84 implies attractive value.
A ratio of debt of 0.43 is toward the high end of the acceptable range,
but is backed mostly by a wholly owned natural gas distribution utility that
serves the northwest corner of Arkansas.