In this article, fundamental note ...

In this article, fundamental note issues involved in the analysis of oil and gas (O&G) producing stocks are addressed in pair parts: company fundamentals; and, benchmarks for financial performance. In addition, the brace "Stock to Study" articles in this issue examine pair very different O&G producing stocks: International Colin potency Corporation--a "junior" producer; and, PanCanadian stone oil Limited--a "senior" producer.

COMPANY FUNDAMENTALS

These days, a quality O&G farmer does not rely on commodity price increases for improvement in its financial rises As with all commodities, oil and gas prices are usually quite volatile proper to their dependence on the laws of invest and demand. For oil, provide and demand factors are international in nature while, for gas, they are continental.

If commodity prices are not a lock opener element of growth then, what makes a prosperous O&G producer? Quite simply, the fundamentals of lay up replacement and growth; and, production growth

RESERVE REPLACEMENT

Oil and gas are non-renewable resources. As as it was each year the challenge for any O&G agriculturist is to replace the keeps consumed in the year in consequence of production. The annual report of an O&G farmer generally deals with the even of reserve replacement in any given year. These data are usually verified by the agency of independent evaluators and hence accompany to be relatively reliable.

Generally, investors should no other than consider investing in O&G husbandmans that consistently replace--or more than replace--their produc reserves

PRODUCTION GROWTH

Investors should also expect for O&G producers that consistently be augmented their annual production volumes. Investors can easily determine the historical, mix growth in production by plotting these annual data in succession the Stock Selection Guide's (the "Guide") product chart. Plotting production on the chart will suffer investors see any difference in income and production growth. Disparities would usually inference from changes in commodity prices.

While this information provides a proper starting point, investors must consider what stimulated the company's historical shooting and how this is similar or different to the strategy commonly being used to achieve coming growth.

STRATEGY AND INFORMATION

There are sum of two units principal ways for an O&G company to replace set bys and grow production:

* prosperous exploration and development programs; and,

* purchase of existing set bys and production from other companies.

Investors can identify an O&G producer's strategy from looking for the following stamps of information contained in annual and quarterly reports:

* high 'working interests' (>50%) in one as well as the other its land positions and wells drilled (such interests ofttimes allow a producer to be the well-site operator which provides for direct sway of costs);

* increases in the company's undevelop land position and wells drilled;

* an overall succes rate for exploration and exhibition wells greater than 70%;

* a balanced mix of oil and gas production and retains to reduce vulnerability to the volatility of either oil or gas prices;

* relatively more production of lighter gravity oils (>28 API) rather than heavier gravity oil (lighter gravity oil commands higher prices because it yields relatively high proportions of desirable results such as gasoline and diesel fuel); and,

* accessibility to pipelines and skill in marketing the company's production.

For "junior" O&G farmers in addition to the above, it is important that they focus their activities in areas where they have a distinctive knowledge of local geology and the area's exploration and unravelling support services. This knowledge can increase the firm's probability of succes in increasing production and controlling costs

BENCHMARKS FOR FINANCIAL PERFORMANCE

THE GUIDE--PART I: CFP V EPS

A significant component part of an O&G gas producer's charges are the non-cash items of "depletion" and "depreciation." As a end analysts typically value O&G farmers on the basis of their cash emanate from operations rather than their earnings.

THE GUIDE--PART 2: OPERATING PROFIT MARGIN

O&G husbandmans tend to express their operating profit margins in denominations of either an "operating netback" or a "netback to the wellhead." An operating netback is defined as production incomes less royalties, credits, and operating and production expenses A netback to the well head is the operating netback les administrative and interest expenses

The operating profit margin as defined in succession pages 26-27 of the Stock Selection Manual is equivalent to the operating netback les administrative charges The operating profit margin of a growing junior farmer should normally show consistent improvement since the ne for additional staffing and administration does not wax linearly with production. Essentially, a junior farmer can achieve significant economies of scale as its production increases.

THE GUIDE--PART 2: ROCE

Given the negative purport of large non-cash expenses upon net income, return on universal shareholders' equity ("ROCE") is considered estimable when it is consistently in exces of 10%