Thanks for the explanation. I have not done much on political message boards since Yahoo got rid of the Presidential election 2000 message board. I'll check out your word press.
Boolean, I suspect we may have found the individual that gives you all those thumbs down posts on the ESTE board. One of his new id's appears to be offgridblogger.
Here's another strategy for you since you think USEG is high risk...
Come back in another three months and see if the EPS and share price has turned around. If the share price doesn't go up, you will have saved yourself some aggravation. But if you're late to the party, there might still be some momentum to ride.
Why do you consider USEG high risk? I there a fundamental danger? Could something cause it to go bk?
$56 thousand per GAAP.
Since you said you are still doing your DD, I asked Margin whether he would recommend these shares to you at a price of $4.03.
So far, Margin hasn't answered.
I don't agree with your high risk assessment. IMO it is low risk because the share price is so low compared to the value of its assets.
The oil business is being monetized in a normal time frame. Just as it's taken a couple of years to bring half of ESTE's Statoil wells on line, it will take some time to bring the Buda wells online. Last quarter, 10 gross wells of 40 (long term potential of 80) showed production results. Two more are acknowledged to be showing production in Q3 and a total of 15 are expected online by year end. At the beginning of August, it was disclosed that the last 4 Buda wells were extreme winners.
The mining business is more confusing. But it seems management is trying to bring it to resolution. When they do there might be a significant one time windfall. Despite this, there is plenty of cash to keep the mining project going.
Barry, regarding you question about property valuation have you looked at page 19 of the investor presentation? This is the one set of properties where we have a statement from the company about what it might be valued.
It suggests a potential PV-10 for Buda of $140 million based on 320 acre spacing, and if 160 acre spacing was used the PV-10 goes to $280 million.
For Boolean's info, almost non of this value is listed on the balance sheet, as it only goes on at cost, not value. In fact only a pittance of that $140-280 million of potential PV-10 was listed in the year end standardized measure of discounted cash flows.
The way I evaluate things is as the company acquired these properties, it created value that isn't recognized through the income statement until actually converted into production and sales. But the value of these properties is so huge in proportion to the company's size that just looking at the income statement with a glance doesn't provide an accurate picture of the company's performance.
Since you're a big picture guy, consider Buffet's advice on investing...He looked for companies whose individual business units could be sold for a much higher price than the share price of the company. We have three separate business units in USEG, Bakken wells, Texas wells and the moly mine. I suspect the value of those properties are three to five times higher than represented in the share price.
Accounting of oil and mining companies can be a bit tricky. In the case of the moly mine, it hasn't yet produced revenues so all it does is show bottom line losses. The value is in the property which is probably many times more than the book value. I believe management is trying to position it so that it can be sold for fair value, when it occurs this would be a huge catalyst to the share price.
The Bakken wells have been underproducers, averaging only 83 boe/d per net well in 2013. Despite that, some of those underperforming properties were just sold for $11.5 million quite a premium over their 7.5 million PV-10. But back to accounting the revenue came in as a credit to the general property pool rather than a gain in the income statement (ESTE used the same technique when it sold its Colorado gas properties.)
The Buda wells are transforming, lots of profit, quick pay back and PV-10 values several times the development costs.
The recent share weakness at USEG reminds me of what happened to ESTE in the spring of 2013, when the share price kept going down on low trading volumes. After the dust settled, it was obvious that ESTE's share price decline had nothing to do with its fundamentals...
I was thinking it was $3 million annually, not per quarter.
While I'd like to see the company provide a full analysis of this mine's value at some point, I respect the fact that there may be some sensitive negotiations going on with the locals and maybe the management doesn't want to say much now.
I'd like them to describe the values of their properties, Eagleford, Buda, Bakken and moly.
Regarding your comment on the lower level of reserves for Buda wells, it will be interesting to see if the dual lateral method used on more recent wells has any impact on that reserve size.
It seems like with new revenues coming in from the Beeler 19H and 20H, both incredibly good wells and both with a 22.5% net revenue interest.
Plus new results from the Bruce Weaver 2H with a 7.5% working interest....
Plus two more wells producing from Dimmit County with a 22.5% net revenue interest.....
There's a potential of quite a bit more revenue....
There's such a lag between property acquisition and development vs revenue. The company will have a stream of revenues coming for years from the Buda wells and recent Bakken investments. So one of the questions is how much value was created out of these properties vs the investment? The answer did not show up on the income statement.
Likewise, there may be a liability developing with the moly mine, despite that it shows on the balance sheet as an asset worth over $20 million. IMO, the management owes shareholders a statement about this property so that we can get a better idea whether it is worth something or not.
Right now I don't believe the income statement, depletion issue or PE ratio makes much difference. ESTE is acquiring a firm five times its size and that's what matters.
You ask could somethin go wrong here? What if Oak Valley's results came in under expectations? Not that I am predicting it, but Oak Valley could take the existing Earthstone right down with it.
While I can't speak to the last seven years, there have been some improvements over the last year that aren't reflected in the income statement or balance sheet.
One of them was the year end improvement to the wells where PV-10 was valued $35 million higher despite no year over year increase in the book value of the companies properties.
Another was the recent sale of Bakken properties that could have shown up as a gain, instead just flowed through as a reduction to the asset pool (I can't believe they get away with that kind of transaction under GAAP, but as Barry pointed out it is common for oil drilling companies.)