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Abraxis a Bargain Today?



August 13, 2014 – Comments (0) | RELATED TICKERS: AXAS

Location: Teacherman1's CAPS Blog

Author: Teacherman1

I posted this as a pitch reply today, but wanted to make sure anyone who had any interest got a chance to see it.   

Ignorance on the part of some investors on how to read an E & P [Oil Exploration & Production] earnings report is allowing "day traders" and "shorts", to steal this stock from them.

Like all companies, E & P's like to avoid paying Federal taxes when they can, but they have a "special" advantage called the "depletion allowance" which lets them write down earnings to account for the fact that over time, the assets they have in the ground will eventually play out.

This would be like what would happen if, for example, a commercial real estate company could use "accelerated depreciation" and write down the eventual useful life of a property, at the time they buy it.

AXAS, by the way, has C curves, (an indicator of how quickly the production will be "used up"), which, for the most part, have historically been superior to most other small E & P companies.

Using normal accounting procedures, they reported $0.03 per share earnings for the 2nd quarter, but if you use a more meaningful (for this kind of business) method of accounting for earnings, which would be EBITDA, adding back the depletion, depreciation and amat., of which depletion is far and away the greatest amount, they had earnings per share of $0.11.

Normal accounting methods also does not take into account the "non-cash" hedge positions which impact reported earnings.

This allows them to "write off" the value of their assets for the next 2,3 or 4 years, against current earnings. This provides for a much greater "cash flow".

A quick glance at the balance sheet makes it appear that they have no "working capital". This is something they do by choice.
They use their bank credit line to fund working capital as needed, thereby lowering their interest expense by not holding extra current cash.

They used the proceeds from the recent stock issue to pay down their bank credit line, to lower interest expense and free up available credit to use as needed.

The share price today is even better than it was the day before the earnings report, and a great "buy in" price for longer term investors.

Do your own DD, but this is still a bargain.

JMO and worth exactly what I am charging for it.


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