NEP update after 3Q results

China Northeast Petroleum (NEP) announced their 3rd Q earnings this morning, along with 4th quarter and full year guidance. As usual, the company set another quarterly production record and had solid positive earnings.
In this post we will examine the company's performance over the last few years. I am also working on a 2nd post which will present my projections for the company in 2010 and future years.

I have had a substantial (for me anyways) position in this stock for two years now and what has been very interesting for me to see is that so far the performance of the actual company has far outperformed the stock performance. That is pretty impressive considering that the value of my position has doubled.

Historical Performance

The table and chart below show actual results for NEP's last 15 Qs, as well as projected data for the 4th Q09 based on estimates provided by the company in their recent earnings release. It is important to note that the estimates for Q4 DO NOT include projected revenues ($13mil) and net income (est about $4.6mil) of NEP's newest acquisition, Tiancheng, an oil drilling and services business. I have expressly left this new source of revenue and income out of the Q4 Est in order to show only the oil production results. The new company will be an important source of new revenues which I will discuss in the 2nd post.

Q4 estimates assume $65/barrel average oil prices based on the Mean of Platts Singapore index during the months of Sept, Oct, and Nov (this is because NEP is paid the previous month's price for oil delivered each month). This index requires a paid subscription, but thanks to Nawar on the Yahoo MBs, we can use the average price of Cinta crude on the Indonesian Crude Price index as an appr0ximation (recently Cinta has been about $1/barrel higher then the MOPS price received by NEP as per their recent 10-Q).

The company has clearly done an excellent job exponentially increasing both revenues and net income over the past four years. This growth has come mainly due to a 12-fold increase in production, with some help from higher oil prices. During the middle of 2008 the company was clearly helped by record oil prices, but it also proved that it could earn a reasonable profit even with oil averaging $40 as it did in Q1 2009. As can be seen by the chart below (courtesy of Stockcharts.com), investors were worried that the company would have serious issues making a profit on $40 oil, driving the price of the stock down to $1.25/share in March 2009. An $.11 EPS for Q1 2009 was enough to show investors that their fears were unfounded, and subsequently the stock price moved from $1.25 to over $5 in the next three months.

Today the stock trades at $5.16, with TTM earnings of $.78/share, meaning that the company trades at a trailing PE of about 6.6. Not a bad deal for a company whose revenues and earnings are both at least 12 times higher then they were 3 years ago.

In the next couple days I plan to post my projections for 2010 earnings, as well as look at what we could expect this company to look like in 5-10 years.

If anyone has any questions they would like answered in the next post or comments, feel free to leave them.

PS: Thus far, I have not fulfilled my part of the plan my brother and I had when we started themarketbrothers blog. Going forward I am planning to continue making contributions. You'll notice quickly that my posts will tend to be more fundamentally oriented, while my brother prefers technical analysis.


Gabriel said...

Nice analysis Mr. Aurelien.

Windenberger said...

Glad to see trying to catch up with Narayana and post some good research and analysis, too, Aurelien. Let's get some traffic to this, guys.