Thoughts on POE, CAPEX, cash flow, etc. “Cash flow” is an accounting term, and we allknow what it refers to. But, it is recognized before Capex. Assuch, even if POE were to run with a somewhat flawed 09’ cash flow of $80mm($1.67/share) it doesn’t take into account the fact that only $20 million of itwill be spent in Thailand. The other $60mm will be free toinvest elsewhere and grow the business (new ventures etc), or to dividend(which would be $1.30/share in 2009) etc.
The relevance of the above:
If POE were to spend all $80mm –literally burn the additional unexpended $60mm on drilling – their sameaccounting “cash flow” would be $130mm in 2009. (The tax recovery wouldbe $50mm of that $60mm spent). The per share cash flow would then be$2.89 a share and the same 6x CF metric would now yield a valuation of $17.34per share, as opposed to $10.00 per share if they did not spent the extra$60mm.
So I ask this – which company wouldyou rather own? The one with $60mm of “free” cash flow to chase other opportunitiesand grow its NAV (or dividend etc.) but is only “valued at $10” , OR theone who spends all $80mm but by the miracles of a particular “cash flow metric”is worth $17.34/share.
The obvious, and proper, answer isthe company that generates the exact same amount of cash but has this extra$60mm laying around each year.
So how should that be properlyrecognized in any valuation or target price? One can start with therisked NAV – in W.W. case that’s $13.21/share of NPV, after tax, discounted,risked NAV. From there you make what should be an easy assumption - thatthe same group of people who provided shareholders with a 1,300% return overthe last 36 months will be able to grow that NAV from the existing startingpoint of $13.21. After all they’ve got $60mm a year to do it with. (Andto be clear, they still have the $20mm to spend in Thailand to drill the “risked” $3 portion,unrisked $20/share, of the $13.21/share risked NAV).
It would then seem, and to thosethat follow this point, that a target price would be somewhere significantly north of$13.21/share. If not, why not light a match and burn the extra $60mm eachand every year in an effort to increase the accounting cash flow and thereforetarget price?
Why not contact the CFO of POE andget his opinion?
Jason Bednar
CFO, Pan Orient Energy Corp.
1505, 505 – 3rdSt. S.W.
Calgary, Alberta, CANADA
T2P 3E6
ALSO
-the recent report bya brokerage house makes assumptions that all production will only be from theL44 concession. Currently approximately 10% of POE’s existing production(with another well currently being tested) and approx 25% of their existing 2Preserves are from the SWIA concession which is not currently subject to SRB
-POE has 3 otherconcessions, (SWIA - with existing production, and 100% L53 - with productionright in the middle of it, and the north L33 block) that are not subject to anySRB on approximately the first $60mm of cash flows on EACH concession.
-Once cash flow is inexcess of $60mm gross PER CONCESSION the incremental SRB rate is about 4% perevery additional $10mm of revenue, for the next approximately $100mm ofrevenue. For perspective the WW model in 2009 (with all production fromL44) models an SRB rate of 64% - and thus approx $160mm in SRB tax (net to POE)in 2009 alone. Obviously the difference in having production in multiple concessions(which POE already does to some extent) is massive.
Ihope you all find these thoughts (which didn't originate with me to be honest) as reassuring as I do.
Zorgon