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   Gold/Mining/EnergyOil & Gas Exploration & Production Co.'s


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To: Ed Ajootian who started this subject1/19/2003 10:47:48 PM
From: Ed Ajootian
   of 112
 
Below is a somewhat jumbled copy of a research report on KCS Energy (KCS), which is a great play on natgas prices IMO:

KCS Energy Inc. (KCS/NYSE): New Credit Facility Complete: Upgrading to a Buy
Irene O. Haas (713) 250-4235; Irene.haas@smhhou.com
Stephanie Joe (713) 220-5139; Stephanie.joe@smhhou.com January 16, 2003
Industry: Energy Industries Recommendation: Buy
___________________________________________________________________________________________
Price: $2.49 Price Target: $4.00 Type: Change in Recommendation
___________________________________________________________________________________________
Estimates (Dec.) 2001 2002E 2003E
Curr Curr Prior Curr Prior Investment Profile Q302
EPS (Diluted) $1.69 ($0.15) $0.68 $0.77 Share Base (mm) 36.2
P/E NM 3.7x Market Value ($mm) $90
CFPS (Diluted) $1.77 $0.57 $1.26 $1.36 Cash ($mm) $10
P/CF 4.4x 2.0x Long Term Debt ($mm) $134
EBITDA ($mm) $80 $35 $64 $65 Preferred $13
EV/EBITDA 6.5x 3.5x Enterprise Value ($mm) $227
Dividend Rate Nil % Leverage 119%
Dividend Yield Nil Inst’l Ownership 25%
Daily Trading Vol. 932,100
Price Range (52-week) $4.01 -
$1.14
Erngs. Per Share 2001 2002E Prior 2003E
Q1 1.21 (0.03) (0.03) NA
Q2 0.48 (0.38) (0.38) NA
Q3 0.22 0.09 0.09 NA
Q4 -0.11 0.14 0.14 NA
Cash Flow 2001 2002E Prior 2003E
Q1 1.18 0.07 0.07 NA
Q2 0.43 0.13 0.13 NA
Q3 0.23 0.17 0.17 NA
Q4 0.07 0.19 0.19 NA
___________________________________________________________________________________________
Please refer to smhhou.com for important SMH disclosures. The valuation methods used
by SMH to determine the price target for this security, along with the risks, are detailed within this report. If any
hyperlink is inaccessible, please call 800-423-9656 and ask for the Research Editor.
KEY POINTS
• KCS announced yesterday that it has completed its financing. The existing credit agreement was amended and restated, and
will provide $90 million in borrowing capacity, a $40 million term loan and $50 million in revolving facilities maturing on
October 3, 2005. Proceeds of $69.3 million were used to pay off the note obligations, leaving $20.7 million of availability.
One-third of the facility bears an interest rate of LIBOR plus 2.75% to 3.0%, or prime plus 0.5% to 0.75%, depending on
utilization. The other two-thirds of the facility, which can be pre-paid without penalty, bears interest based on the prime
rate, equal to 9%, and increasing annually.
• In our opinion, the completion of the financing is an important event. KCS can once again turn its attention toward drilling
wells and finding oil and gas. The company has set an initial capital spending budget for 2003 of $45 to $50 million. With
a favorable commodity environment and more funds available for drilling, KCS should be able to return to profitability with
the major hurdle of the financing now behind it.
Sanders Morris Harris: KCS 2
• The company also expects to produce 31 bcfe to 35 bcfe in 2003, of which roughly 6.8 bcfe (20%) is allocated to production
payment. This is in line with our expectation. Lease operating expense will range from $22 million to $24 million; G&A
will be $7.5 million to $8.5 million for 2003. Interest expense of $19 million to $20 million is slightly higher than our
previous estimate. We are revising our 2003E EPS estimate to $0.68 per share and our cash flow estimate to $1.26 per
share; our previous estimates were $0.77 and $1.36, respectively. KCS should generate roughly $50 million in cash flow,
sufficient to finance its capital spending in 2003. We are very encouraged by this positive development; therefore, we are
raising our recommendation to Buy from Hold.
Company Profile
KCS’s primary focus areas are the Mid-Continent region and onshore Gulf Coast. The company has key operations in the
Anadarko and Arkoma basins, North Louisiana, West Texas and Michigan. Along the Gulf Coast, the focus properties are in
South Texas, Coastal Louisiana and the Mississippi Salt Basin. KCS Energy devoted most of 2002 toward the redemption of
the $61.274 million Senior Notes due January 15, 2003. The company sold assets and slashed its budget to conserve cash.
Now that the financing is over, we believe the company will began to ramp up its drilling program in 2003.
Table 1: Revised Estimates
Current Previous
2002E EPS ($0.15) ($0.15)
2002E CFPS $0.57 $0.57
2003E EPS $0.68 $0.77
2003E CFPS $1.26 $1.36
2002E Basic Share Base (million) 35.83 35.83
2002EWTI ($/bbl) $26.06 $26.06
2002E Henry Hub ($/mcf) $3.35 $3.35
2003E WTI ($/bbl) $26.00 $26.00
2003E Henry Hub ($/mcf) $3.75 $3.75
2002E Production (bcfe) 37.50 37.50
2003E Production (bcfe) 35.41 35.41
2002E Production Growth (19%) (19%)
2003E Production Growth (6%) (6%)
2003E All-in Cost ($/mcfe) $2.88 $2.77
2003E Cash Cost ($/mcfe) $1.58 $1.47
SMH estimates
Valuation and Price Targets
In valuing our E&P companies, we use a price-to-cash flow multiple. We establish a reasonable range based on historic
averages of a group of broad-based E&P companies, which includes ten E&P companies with market capitalizations ranging
from $900 million to $10 billion. Our 12-month price target of $4.00 is based on 3.0 times our 2003 cash flow per share
estimate of $1.26. We use a low multiple to reflect KCS’s high leverage.
Investment Risks
• KCS has a small market capitalization, a relatively thin float and light trading volume, which, under certain circumstances,
could make the stock more volatile.
• The company’s production mix is roughly 79% natural gas: with each $0.10/mmbtu change in Henry Hub natural gas prices,
both 2003E EPS and CFPS could be impacted by $0.05 each. Also, with each $1.00/bbl change in WTI oil price, the 2003E
EPS and CFPS could both be impacted by $0.03. In addition, the high debt level makes KCS more sensitive to positive or
negative outlooks on U.S. natural gas prices.
Investors should assume that Sanders Morris Harris is seeking, or will seek, investment banking or other services from the covered companies.
The analyst(s) responsible for preparing this research, received compensation that is based on various factors, including SMH’s total revenues, a portion of which is generated by
SMH’s investment banking activities.
Sanders Morris Harris: KCS 3
This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who
receive it.
Sanders Morris Harris Group's Ratings are defined as follows: Strong Buy: We anticipate 20%-plus price upside over the next six months. Buy/Outperform: We anticipate 10%-
20% price upside over the next 12 months. Hold: We believe the stock is fairly valued at current levels. Sell/Underperform: We anticipate the stock price will decline from current
levels over the next 12 months.
Copyright 2003 Sanders Morris Harris Group. The study herein is not a complete analysis of every material fact respecting any company, industry, or security. The opinions
expressed here reflect the judgment of the author at this date and are subject to change. Facts have been obtained from sources considered to be reliable, but are not guaranteed.
Sanders Morris Harris, its officers, directors, and/or employees may have an interest in the securities of the issue(s) described herein and may purchase, sell, trade or act as market
maker while this report is in circulation.
600 Travis • Suite 3100 • Houston, Texas 77002 • (713) 250-4263

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To: Arktic who wrote (25)1/19/2003 10:53:38 PM
From: Ed Ajootian
   of 112
 
Paul,

FXEN should be interesting. I am putting most of my $$$ into US natgas stuff right now due to the nutty prices but I realize this could turn out to have been a bad idea if it turns warm all of a sudden so its nice to hear of these other ideas.

Great to hear of your success in AK. When the heck are you gonna go public so I can help hype your stock? <g> Let's see, I like "Alaska Energy Corp." for a name, ticker AKE! (Amex is the place to be IMO).

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To: Ed Ajootian who started this subject1/21/2003 5:17:32 PM
From: Ed Ajootian
   of 112
 
A URMP fan PM'd me this question:

URMP drilled a hole down into the tar sands dome. They got good oil and gas shows. Now they have switched to a production-type rig and the bore hole is being "..swabbed out.." to help get a good indication of flows - according to the company. Makes sense to me.......

Some BOZO on another board said that swabbing was an act of desperation.

What does the "..swabbing..." mean to you....?? I would thing that steam injection, acid, etc., would be more "...desperate..." measures.

******************************************************

Since I don't know much about this aspect of the O&G business I figured I'd post the question here to see if someone else can help.

I'm used to just sitting back having the company not disclose this level of detail, and then tell me at the end of the day whether its thumbs up or thumbs down.

My hunch is that the fact that they are swabbing is not a show-stopper but its not real positive either.

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To: sam_n_cctx who wrote (21)1/22/2003 6:08:01 PM
From: Ed Ajootian
   of 112
 
EPL, Energy Partners Ltd. -- They just announced another huge exploratory success, in their East Bay field, see biz.yahoo.com
This well found the most pay ever for them I believe, 308 feet! Just to give you some perspective, a "good" well on the GOM shallow waters maybe finds 50 ft. of pay. Also most of the sands it encountered were updip to sands that were being produced from other wells in the area, so there should be more pressure in this one.

This company's stock has hit a brick wall at the $11 mark due to some dilutive securities at or below this quote, but I believe the necessary earthquake to blow through that wall has now been acheived. I would expect this well to have discovered 20 - 30 BCFE of hydrocarbons, and EPL owns 56% of it.

EPL has already (i.e., prior to this well) announced that they expected their production for 1Q to be 30% higher than 4Q '02. Too bad RJ didn't include EPL in their study!

I'm calling for EPL to generate about $125 M of cash flow in '03 based on $4.25 gas. This works out to about a 3 multiple of cash flow per fully diluted share, and about a 4 multiple of Enterprise Value / EBITDA.

Also, their president has just done an interview on www.ceocast.com that you may find of interest. (My experience with those are that they are mostly worthless due to the inane questions that are posted by the interviewers). BTW, at the ceocast site they are offering a conference call tomorrow afternoon on energy stocks in general, which you may also find of interest.

I never used to even bother looking at stocks with market caps over a coupla hundred million dollars, thinking that the market would be too efficient and would price these stocks correctly given their progress (or lack thereof). My experience with EPL has indicated that even stocks with $300 M market caps can be inefficiently priced.

Anybody looking to get into an E&P stock whose price has not run up outta sight yet should take a look at EPL. They announce 4Q, year-end reserves, and '03 plans on 2/6.

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To: Ed Ajootian who wrote (29)1/23/2003 12:16:37 PM
From: Dale Baker
   of 112
 
If you had to compare EPL and REM, how would they stack up?

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To: Dale Baker who wrote (30)1/23/2003 11:22:52 PM
From: Ed Ajootian
   of 112
 
Dale, An excellent question and one which I had asked myself and answered with some rough numbers in my head. When I did that I came to the conclusion that EPL was being signficantly discounted vs. REM but now that I crunched the numbers it looks a lot closer.

These companies are very similar. EPL limits its operations to the Gulf offshore, but REM also does some onshore exploration. There is one qualitative difference at the moment, which is that REM has announced that massive discovery at Tatum Dome, for which everyone is waiting on the likely imminent dissemination of more info. But putting that aside, here is how they stack up.

For production figures for both I'm using figures from analyst reports by CIBC, which happened to issue updates on both companies on 1/16, so both are reasonably fresh.

EPL will produce 48 BCFE in '03 vs. REM's 36 BCFE. Cash flow (using $4.25 gas and $27 oil) for EPL will be $125M and REM will be $124 M. EBITDA for EPL is $133 M to REM's $126 M. (Obviously REM is doing a better job at controlling costs!).

Since EPL has more debt than REM and also has preferred stock, it would seem that the only way to compare the two fairly would be as a ratio of Total Enterprise Value (i.e., market cap plus debt plus preferred value) divided by EBITDA. Under these measures, EPL is trading at a ratio of 3.4, whereas REM is at 4.1. Interestingly, if you take away the $2/share that REM's stock has gone up since they announced Tatum Dome you get a ratio of 3.5.

So this interesting exercise has me now wondering whether EPL is as undervalued as I thought it was.

In any event I'm holding until 2/6 so I can see what their proved reserves ended up to be.

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To: Ed Ajootian who wrote (31)1/24/2003 2:51:14 AM
From: Dale Baker
   of 112
 
Thanks, Ed, I figured it was a close call between EPL and REM. I like REM's lack of debt and the flexibility it gives them.

Still holding CPE, XTO and EENC here too. Good year to have gas.

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To: Dale Baker who wrote (32)1/24/2003 9:22:45 AM
From: jmhollen
   of 112
 
Good year to have gas.

Sounds like you should acquire some Yum! Brands, Inc., as their Taco Bell holdings should provide exactly what you need.........

Ha ha ha ha ha ha ha................. Sorry 'bout that, it was just too good to 'pass' up.

John :-)

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To: Ed Ajootian who wrote (31)1/24/2003 5:02:11 PM
From: sam_n_cctx
   of 112
 
Hi Ed

i posted an earlier message, dunno where it went or if it was my procedure.

but, it concerned Peyto a canadian E&P. I have been in Pey.to since dec 12, 2002. Also listed on nasdaq as pexdf. but i get much better charts from stockcharts.com

Q 4 2001 8 wells Q 42002 19 wells

press release yesterday shows.. a price of 18.60 per share canadian.. this is in the Q4 press release.

as i have told u before, i am useless in understanding a Q4, 10k etc.

here is the link to the press release
peyto.com

and the chart
stockcharts.com[h,a]daclyiay[db][pc8!c20][vc60][iut!Ub14!Ua12,26,9]&pref=G

my question is.. from the q4 is this stock worth that much? or even close to it?

they are listed on the toronto exchange, tse.com quotes pey from there u can access there profile etc.. or there website.. WWW.Peyto.com

thanks sam...

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To: sam_n_cctx who wrote (34)1/28/2003 8:14:04 AM
From: Ed Ajootian
   of 112
 
Sorry Sam, I've been a busy bastard recently and also I know precious little about Canadian oil & gas reporting rules. See Message 18500191

Hopefully someone will be kind enough to help us.

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