RE: RE: RE: RE: Market misunderstands TOLThe AAOI analysis underestimated the capital required to develop these assets. The oil & gas business is highly capital intensive, especially for a junior looking to rapidly grow production and reserves. There should be no discussion of free cash flow, because all of it and more go back into the ground. Why do you think EQU just did a convert financing (their second issue)? What do you think is going to happen to the converts that mature in June 2012? If you answered: "Highly dilutive equity issue to creditors", then you'd probably be correct. No junior lives within cash flow.
Now one thing your missing is the discussion of production growth. Let's compare EQU vs TOL cash flow, capital programs, liquidity and production for 2011.
EQU forecasts cash flow of $55mm, has net debt of $145mm with $55mm on credit line (without considering covenants). They have indicated that they plan on spending $60mm, which will result in $5mm of additional debt.
Forecast CF for TOL is $27mm (consensus). TOL has positive working capital of $5mm and a $25mm credit line, giving total liquidity of almost $60mm. They recently announced their capital program of $60mm, drilling 20 wells. This implies they will most likely do an equity financing by year's end (or an asset sale - Tableland would be a great divestiture).
Notice that TOL has the same size capital program as EQU, but is 1/4 the size. TOL plans to double production from current 1,250 boe/d to 2,200 boe/d with the $60mm. EQU plans on utilizing their $60mm to keep production flat (they exited at 9,100 boe/d and are forecasting 9,100 boe/d average production for 2011).
What business would you rather own? One that doubles production or one that keeps production flat using the same amount of money? Plus TOL is pursuing oil targets, which are a magnitude more profitable than dry gas. The main question with forecasts is, can they deliver?
You have to realize that companies don't have to spend above cash flow and issue equity if they don't want to. However, their production will suffer. Note that in 2009 noone was raising equity, they were all sitting on their hands waiting for markets to recover. Now that valuations are back, all are financing.
In junior oil and gas, production drives valuation, so production growth is paramount. Cheers.