NLG.TO

[Michael]

Usedcasting,

I don't think that is wishful thinking. I believe that is close to 100% sure.

15% increase in reserves will over time translate into 15% increase in profit which will translate into 15% increase in PPS.

The important issue here is "over time". The share market is unfortunately not rational and I guess your question is if the share price will increase 15% now and that might be wishfull thinking (but then it might not!)

Did you see Petrokazakhstan's earning release today?

Significant lower production and higher oil prices translated into an increase in profit of 13.6%

NLG is in the same market but we have significant higher production and significant higher oil prices. I can't wait to see the earning release

[Michael]

Usedcasting,

Maybe we were a bit too unkind to the market yesterday. It finally decided to move NLG up with good volume. 

We are still in the same bullish trend, which started in June, and I believe we have enough oil to keep this rocket flying for some time. We should soon have a date for earnings and we could se a little acceleration when people start to multiply production increases with oil price increases. That is an explosive combination!

[valueseeker]

Hi Michael,

Great pick! Thanks.

I wish I had more Canadian $ to put in.


-Louis

[usedcasting]

I've tried e-mailing Nlg for report date but no response. I've found them not that accommodating with shareholders. But if its all work and no play that's OK with me.

To all, have a great weekend!

Oil above 60

[Orvis4]

Q2 and half year results to be released on August 15th (NR for this just out in the UK)

[usedcasting]

Thanks Orvis4 for the info.

I have a couple of general questions.

1) What is Nlg's cash position.
2) Why so many outstanding shares
3) And would it make sense to start buying back shares.

Just trying to look toward the future.

Cheers

[Michael]

Hi Usedcasting

NLG had 63 million (CAD) cash and cash equivalents by the end of Q1. They generated 35 million operational cash flow during the same quarter. Much of the cash was used to bring the debt down.

If you read from the start of this thread you will see why they issued shares. I think it was a very wise move which we are benefiting from now. I certainly wouldn't like them to buy back shares. Nelson has access to deals in Kazakhstan that the big oil companies can only dream about. Any cash they might have should be used to take advantage of this!

We are now one week away from earnings. The revenue last quarter was 98 million and profit 35 million. I expect both figures to go up. The increase in oil prices will however cause a loss in KOA's derivates instruments and there will most likely be other compensation cost (they had a Q1 gain on other compensation cost of 9 million!). The increase in revenue is therefore not expected to be reflected fully in the profit for this quarter.

KOA's derivates instrument expires in August this year and this alone will boost NLG's profit significantly.

Longterm NLG PPS depends on three things:

Reserves
Production
Oil price

All of these are showing very bullish trends. the latest forecast for reserves and production is already discussed here so let me finish with the oil price chart. As can be seen the oil price in Q2 has been higher than Q1 and looking to the future it seems like the oil price will be even higher in Q3.

[strokata]

Hi Michael,
you said, that derivates instruments will expire in August this year.
I think this is wrong but I'm not 100% sure
But a while ago, I've read something like they entered into new derivative contracts which are valid until end of 2006.
Unfortunately I don't remember where I read that.

So if you could shed a little light on this, any information would be very appreciated!!

Heavy derivative costs is really the bad point about Nelson.
All other oil stocks generate enormous amounts of money with this high oil price.
while it seems rather more and more expensive for Nelson.

Wish, I had some numbers to do the math

[Michael]

Hi Strokata,

I am actually wrong  - they expire in August 2006. Thanks for pointing that out! (I was writing from my memory, which is not as good as it used to be  )

Here are the details:

Contract amount
(bbls per month)       Contract period                   Written call ($/bbl)
120,000             September 2003 to August 2006           30.00
150,000             December 2003 to August 2006            29.50

This is as fare as I know the only call contracts they have. I am not concerned about the put options.

Once again sorry for the mistake!

[Michael]

Strokata,

One more comment about the call contracts:

KOA's production exceeds by fare the call contracts so KOA do benefit from the Increase in oil price (as can be seen in their result!) and also remember that NLG is only a 50% shareholder of KOA.

When that is said I can't wait to see those contracts expire!

[usedcasting]

Thanks Michael for answering my questions.

[Orvis4]

This board is quiet given its less than 4 working days to the interim results!

Investing from the UK its hard to get a feel for sentiment in Canada for this stock. Although its quoted on the LSE its the Toronto exchange that drives the sp.
Can anyone give me a steer on what expectations are for the sp at and after the interims i.e. will it be a case of buy on rumour and sell on news, or will it be a case of an overlooked stock getting some deserved attention and sp rise?

[strokata]

Derivative instruments (continued)
In March 2005, the Company purchased the following derivative instruments:
Contract amount (bbls/month)  Contract period                Contract type ($/bbl) *
75,000                         April 2005 to June 2005              Purchased put 33.00
160,000                       July 2005 to September 2005      Purchased put 33.00
170,000                       October 2005 to December 2005 Purchased put 33.00
                       
Michael, I found the info about the new contracts they entered into this year
and actually, it's all put contracts to counter-balance the existing calls, which were written in 2003.

I am very happy they did that and hope they will enter into additional put contracts for the time after December until August 2006

If not those calls could be pretty expensive.

In Q1, they paid (or actually deferred) derivative costs of 5.32 million USD, Brent averaged at 47.71, way higher than their avg call price of 29.72 .. let's calculate ..  okay roughly 98000$ per month and brent$ above 29.72

Let's assume we had an oil price of 80, derivative costs would be as high as (80-30)*98000 ~ 4.9m USD per month!!
Very rough calc without no guarantee

but anyway, I'm less concerned when I see their put amounts for Q3 and Q4..

[video]

From Aton today


Top News
Nelson Resources. Output rises 9% m-o-m in July
Nelson Resources posted a 9% m-o-m increase in crude oil production to 31.5mbpd, according to Kazakh Energy Ministry data cited by Interfax. Output was up 73% y-o-y and came in 8% above our estimated 2Q05 average, with all fields contributing to the growth.

Though a 41% m-o-m increase at North Buzachi was partly due to the installation of new processing facilities resulting in lower output in June, the 54% y-o-y increase at the field demonstrates Nelson's ability to intensify development of newly acquired assets. Karakuduk's 40% y-o-y production growth is additional evidence on this front, as the field had experienced a steady decline before Nelson's arrival in May 2004.

The news is clearly positive for the company and we expect it to be received as such by the market. We reiterate our Buy recommendation on the stock with an end-2005 target price of $3.13.

Nelson Resources production comparison

In '000 bpd July 2004 June 2005 July 2005 Change, m-o-m Change, y-o-y
Kazakhoil Aktobe 22.4 29.8 30.0 1% 34%
North Buzachi 8.4 9.2 13.0 41% 54%
Karakudukmunai 7.8 10.3 10.8 5% 40%
Arman N.A. 3.2 3.7 14% N.A.
Nelson Resources net 18.2 29.0 31.5 9% 73%

Source: Interfax; Kazakh government

Video

[video]

Aton looking for positive numbers:

12 August 2005, Friday
Morning Focus
Top News
Nelson Resources. Expected to report strong US GAAP results on Monday
Nelson Resources is to publish 2Q05 US GAAP results on Monday, which we expect to show a significant rise in revenue coupled with record operating cash flows, though net income is likely to be less impressive due to accounting technicalities.

We estimate that Nelson produced 2.66mn bbls net in 2Q05, double 2Q04's output and up 14% q-o-q. Oil prices rose 7% q-o-q in 2Q05, but we expect Nelson to post 29% q-o-q revenue growth on the back of a reduction in sweet/light-sour/heavy crude oil spreads in the period. Our estimate may even prove conservative if the company managed to sell crude stock accumulated at the Karakuduk field in1Q05.

Total operating expenses should increase 72% q-o-q, mostly due to the low base effect as the first quarter showed a non-cash gain in additional compensation costs. This line is volatile because it includes Nelson's management share option remuneration program and hence tracks the company's stock volatility. We expect this non-cash item to have no impact on 2Q05's total operating expenses as a small quarterly share price gain should be offset by a reduction in stock option time to expiration.

Production and transportation costs are forecast to rise in line with crude oil output growth and inflation. As a result EBITDA should rise 16% q-o-q to a record $87.5mn. Pretax income will be depressed by $12mn in expenses from the company's hedging program, which are not included in operating expenses in Nelson's accounting.

As a result, we expect net income to decline slightly on a q-o-q basis to $32mn. However, operating cash flow, our main indicator of the company's performance, should soar 34% q-o-q to a record $47mn.
Meanwhile, capex should rise significantly due to seasonal factors to $71mn in 2Q05.

Summing up, we believe our forecast may prove to be somewhat conservative and feel that the actual results will likely be ahead of consensus. We reiterate our Buy recommendation on the stock with an end-2005 target price of $3.13.
Nelson Resource 2Q05 financial forecast In $mn, US GAAP 2Q04 1Q05 2Q05F Chg q-o-q Chg y-o-y
Crude oil production, bbl, mn. 1.28 2.34 2.66 14% 108%
Dated Brent, $/bbl 35.3 48.11 51.69 7% 46%
Revenue 50.0 98.5 126.6 29% 153%
Operating expenses -18.7 -22.8 -39.1 72% 109%
EBITDA 32.1 75.7 87.5 16% 173%
DD&A -9.7 -12.9 -15.0 16% 55%
EBIT 8.2 62.7 72.5 16% 782%
Pretax income 6.3 50.9 51.1 0% 715%
Net income 3.3 35.8 31.9 -11% 879%
Operating cash flow 7.9 35.1 46.9 34% 490%
Capex 29.4 23.4 71.0 203% 141%
EBITDA margin 64% 77% 69% -8% 5%
Net income margin 7% 36% 25% -11% 19%


Source: Company data; Aton estimates.

Nelson Resources 2Q05F operating costs breakdown In $mn, US GAAP 2Q04 1Q05 2Q05F Chg q-o-q Chg y-o-y
Cost of sales -6.3 -10.8 -13.7 27% 117%
G&A -8.8 -6.5 -8.3 28% -5%
Additional compensation costs 5.0 9.1 0.0 -100% -100%
Sales and transportation expenses -8.5 -14.6 -17.1 17% 100%
Total operating costs -18.7 -22.8 -39.1 72% 109%
Derivative instruments -13.4 -5.3 -11.9 124% -11%


Source: Company data; Aton estimates.