Southern Pacific Resource Corp STPJF

RE:RE:Price per flowing barrel vs share price

[Eyeinvestor]

Sadly you need a new napkin. I like the result of course, but it wouldn't hold up. On the negative side Revenue does not equal earnings. On the plus side the wells will be working 24/7. These boys don't stop at weekends, nights or holidays. The typical way to value E&P companies is to forecast the revenues from production of what is in the ground and use a discounted cash flow to arrive at what is called a P1 10 (proven reserves) or P2 10 (proven and probable reserves) valuation. P1 10 is the proven reserves extracted at a reasonable rate discounted at 10% per annum. In other words the valuation assumes that you want to earn 10% per year on the asset. If an asset has a p1 10 value of $900 million, then you can pay $900 million for the asset and you will earn 10% per year on that asset and get your capital back over the life of the field. Of course, if you only pay $450 million for a P1 10 asset with an value of $900 million, then you are earning 20% per annum and getting back twice your capital over the useful life of the field. This is why Shat has such a hard time keeping his clothes on! BUT....and its is a big BUT....a P1 10 valuation only has any meaning if the well pairs are working. This is why the price of STP is so sensitive to STP being able to show that pad 2 works and that they have the capital to build future well pads.