High Capital Expenditures Could Derail Goodrich Petroleum

6/30 - "The stock has more than doubled from $30 to $75 in the last three months as excitement over the company’s ownership of land in the Haynesville Shale area has grown. The Haynesville Shale has got a lot of press of late as an area with substantial, albeit difficult to extract, gas reserves. Many naïve investors assume that the value of a company’s reserve position (i.e. the value of the estimated oil and gas under the land the company owns or leases) should translate into its market cap. What they neglect to take into account is that it takes a substantial amount of operational and capital expenditure to extract the reserves. With costs spiraling for exploration companies, the net value to equity investors may turn out to be next to nothing."

"Capital expenditure for the company is running well above D&A, and its free cash flow is hugely negative. The company plans to spend $350Mn on capital expenditures this year. The company’s current run rate suggests it will generate cash from operations of about $80Mn, so it will take on a substantial amount of debt to fund the capital program."

"Fair value for GDP stock: $18 (generous 25x multiple on ’09 EPS estimate of $0.73; valuation approximately 3x ’09 revenues)"