9 Simple Investing Ratios You Need To Know

The markets kicked off the New Year with higher prices, although they
were accompanied with an increase in volatility. Monday brought a
strong gap higher that lifted many stocks, but the rest of the week
was peppered with false moves in both directions. Beyond that, each of
the different market indexes took different directions as the small
caps were hit with some profit-taking while tech stocks finished
higher. In the end, the markets did finish higher across the board
despite the increased volatility.

9 Simple Investing Ratios You Need To Know
The S&P 500, as represented by the *S&P 500 SPDRS* (NYSE:SPY) ETF, led
the charge earlier in the week on the heels of a strong move in the
financials. However, the financials then came under pressure on Friday
and were one of the weakest sectors of the day. There was an increase
in volatility as witnessed by the long lower shadows on several
candles this week, which revealed wide intraday moves. The $126 level
was tested a few times, making it the first level to watch for
near-term traders. A drop below this level could signify more
consolidation ahead. However, the key level to watch remains just
above $130. This was an important pivot high in 2008 and the breakdown
from this level precipitated the worst part of the recent bear market.


While the *Powershares QQQ ETF* (Nasdaq:QQQQ), which represents the
Nasdaq 100, also experienced some volatility, it did manage to surge
to new several-year highs. In fact, QQQQ has actually cleared the
highest level from the last bull market. This is an impressive leading
divergence from the rest of the indexes and could suggest that tech
stocks are becoming a new leader. The $55 level, which had been
acting as a ceiling through December before being cleared this week,
held on a few pullbacks. This is the first level to watch; also keep
an eye on the $54 level for support on a pullback.

Much like SPY, the *Diamonds Trust Series 1* (NYSE:DIA) is also close
to testing a key high from 2008. For DIA, $118.73 was an important
high and should have traders on guard; there's a chance DIA could
trade there soon. DIA continued to press higher, although it too
showed an increase in volatility. However, DIA did defend its gap this
week and should have some support near $115. But can it muster up the
strength to power through $119?

The *iShares Russell 2000 Index* (NYSE:IWM) ETF showed the most
weakness this week. It has been leading the charge higher along with
QQQQ, so perhaps some profit-taking was in order. However, traders
should also be on guard for a possible rotation away from riskier
stocks to safer stocks. The selling in IWM came on increased volume so
traders should be cautious in the near future. Buyers stepped in to
defend the $78 level, so this is the first level to watch. Looking
above, a move above $80 could signal a resumption of the uptrend.

*Bottom Line*
It's been commonly held that the markets usually finish the year in
the same direction as the first week of trading. Despite the
volatility, the markets did close out the week higher and the benefit
of the doubt remains with the bulls. The Nasdaq 100 is at almost a
10-year high and is above its prior bull market highs, which is really
quite surprising considering the extent of the recent bear market.
However, traders need to be cautious as the markets are becoming
overheated as the S&P 500 approaches a key level. Although the trend
has remained higher, the market is becoming increasingly susceptible
to a correction. If this correction occurs, it is likely to be swift,
so traders should remain cautious moving forward.
Source: Investopedia.Com

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Natural Gas Industry: An Investment Guide

Investors looking for publicly traded natural gas companies to purchase are presented with a confusing amount of information that is particular to this industry. This can present a roadblock to understanding and analyzing the sector. Here are some explanations of some common concepts and terms that investors should know.

ReservesReserves are a general term that refers to the amount of natural gas and other hydrocarbons that a company has present on its properties. The industry categorizes these hydrocarbons as either proved, probable or possible reserves.

The most important category of reserves are proved reserves, which are defined as natural gas and other hydrocarbons that geological and engineering data demonstrate with reasonable certainty are recoverable from known reservoirs under current economic methods, government regulations, and operating conditions. The economics of the proved reserves must be determined using a 12-month average price using the price on the first day of each of the preceding 12 months.

Many natural gas companies will also present in marketing materials the amount of proved reserves using different prices than the ones mandated by the regulatory authorities. Investors should be conscious of what prices are used to calculate proved reserves when comparing different companies to each other.

Natural gas companies also have the option of disclosing the amount of probable or possible reserves to investors in regulatory filings, but since both these categories are less certain, investors should not rely on them too heavily. 

Reserves to Production RatioThe reserves to production ratio is a measure of the length of time it would take for a natural gas company to produce all of its proved reserves. The ratio is expressed in years and a higher ratio is generally better. Whiting Petroleum (NYSE:WLL) reported a reserves to production ratio of 13.9 years at the end of 2009. This is based on proved reserves of 275 million BOE and 2009 production of approximately 19.7 million barrels. This is an unrealistic static measure in some ways as a natural gas company is constantly adding to its proved reserves, and like all metrics this should be looked at in the context of other factors.

Basis DifferentialsBasis differentials refer to the regional price discounts that some operators experience when they sell natural gas into the market. These discounts are caused by many factors including the weather, natural gas pipeline capacity, regional demand and the quality of the hydrocarbons. Ultra Petroleum (NYSE:UPL), which is a major producer of natural gas in Wyoming, sells its production into a hub in the Rocky Mountain area. In 2009, the company received an average of 77% of the price of natural gas sold into the Henry Hub in Louisiana.

ProductionProduction is a measure of the amount of natural gas or other hydrocarbons that are produced from wells that a natural gas company has interests in. Since crude oil and natural gas liquids are measured in barrels, and natural gas is measured in cubic feet, there must be a way to convert each hydrocarbon to a standardized form of measurement so that the total production of a company can be analyzed.

The natural gas industry uses a measure called natural gas equivalents to convert any crude oil and natural gas liquids production. Each barrel of crude oil or natural gas liquids is converted to natural gas equivalents using a ratio of one barrel to six thousand cubic feet of natural gas produced. Here is an example of a conversion from Range Resources (NYSE:RRC) for 2009:

Type	Original		Converted
Natural Gas (Cubic Feet)	130,649,000,000		130,649,000,000
Crude Oil (Barrels)	2,557,000	6,000	15,342,000,000
Natural Gas Liquids (Barrels)	2,187,000	6,000	13,122,000,000
Natural Gas Equivalents			159,113,000,000

Range Resources produced 130.65 billion cubic feet of natural gas in 2009. The company also produced 2.6 million barrels of crude oil and 2.2 million barrels of natural gas liquids. After converting these oil and liquids at the 6,000 to 1 ratio, Range Resources produced 159.12 billion cubic feet of natural gas equivalents.

HedgingNatural gas companies also hedge production using collars, swaps, puts and other derivatives. This is done to reduce the volatility of cash flows associated with selling a commodity. Natural gas companies usually present this information in marketing presentations. In 2010, for example, Petrohawk Energy (NYSE:HK), hedged 62% of its estimated 2011 production, and 24% of its estimated 2012 production. (Find out how to stay on top of data reports that could cause volatility in these markets. 

EBITDAXNatural gas companies like to present a non-GAAP measure called EBITDAX when they report quarterly earnings. EBITDAX is an acronym that means earnings before interest, taxes, depreciation, amortization and exploration expenses. Some companies also exclude property impairments and non-cash equity compensation expense when presenting this measure. Here's an example of how Continental Resources (NYSE:CLR) calculated EBIITDAX in the first quarter of 2010.

Net income (loss)	$72,465
Unrealized oil derivative gain	$(19,676)
Income tax expense (benefit)	$44,410
Interest expense	$8,360
Depreciation, depletion, amortization and accretion	$52,587
Property impairments	$15,175
Exploration expense	$1,786
Equity compensation	$2,852
EBITDAX	$177,959

There's nothing wrong with looking at this measure as long as an investor understands that this is not the equivalent of free cash flow, and it should be looked at within the context of other metrics.

Finding and Development CostsNatural gas companies also present finding and development costs as a metric to judge the company's ability to find oil and natural gas reserves at a reasonable cost. These finding and development costs are presented as a unit of reserves found. Here is the calculation that EXCO Resources (NYSE:XCO) used for its finding and development costs in 2009:

Development and Exploration Expenses	$299,837
Proved Reserves Added	$242,056
Per Mcfe	$1.24

EXCO Resources spent approximately $299 million to add 242 Bcfe of proves reserves, resulting in a drill bit finding and developing cost of $1.24 per Mcfe. Pay close attention to how this metric is calculated, as it will typically exclude revisions to reserves during the year and reserves acquired through acquisitions.

CostsA natural gas company reports certain costs and expenses that are specific to the business that it is in, along with expenses typical of any business enterprise. These costs are usually expressed on a unit of production basis, or per thousand cubic feet equivalent (Mcfe). Here is an example from EOG Resources (NYSE:EOG) for 2009. 

Type	Per Mcfe
Lease and Well	75 cents
Transportation Costs	37 cents
DDA - Properties	$1.89
DDA - Other	12 cents
Selling and Admin	32 cents
Interest	13 cents
Total	$3.58
* DDA – Depreciation, Depletion and Amortization

This is not a comprehensive measure of all costs associated with the company, and can exclude things like gathering and processing costs, exploration costs or costs associated with dry holes.

Standardized Measure of Discounted Future Net Cash FlowsAnother measure related to proved reserves is the Standardized Measure of Discounted Future Net Cash Flows from those proved reserves. A natural gas company calculates the revenues expected to be realized from the sale of those reserves when produced, and then subtracts the costs related to producing and developing the proved reserves. Taxes are then deducted from the total, and then the remaining cash flows are typically discounted using a 10% discount rate. 

Here is an example of the calculation from Ultra Petroleum (NYSE:UPL) for 2009:

--	2009
Future Cash Inflows	$12,870,816
Future Production Costs	$(3,916,222)
Future Development Costs	$(2,249,993)
Future Income Taxes	$(1,998,114)
Future Net Cash Flows	$4,706,487
Discounted At 10%	$(2,679,787)
Standardized Measure of	$2,026,700
Discounted Future Net Cash Flows

Net Asset ValueMany investors determine a net asset value for a natural gas company and use the Standardized Measure of Discounted Future Net Cash Flows as a starting point for this calculation. The simplest method of calculating the net asset value is to take the Standardized Measure of Discounted Future Net Cash Flows and divide this by the amount of shares outstanding. 

An analyst will typically make many adjustments to this calculation to make the result more realistic. These adjustments include using a different price for natural gas to determine future cash inflows, or adding in probable or possible reserves if they feel that these less certain reserves are likely to be realized. Another adjustment made is to deduct debt or working capital deficits from the numerator. The denominator is frequently adjusted to account for stock options and other dilutive securities.

Glossary of Natural Gas Terms

• Development Well – A well drilled in a known producing area to an existing productive formation.
• Exploratory Well – A well drilled to find a new natural gas or oil field or reservoir.
• Gross Acres – The amount of lease acreage that a company has a working interest in.
• Net Acres – Gross acreage multiplied by the percent working interest the company has in the lease.
• Royalty Interest – An interest in a natural gas or oil well by an owner without having responsibility for the cost of production.
• Working Interest – An interest in a natural gas or oil well that conveys the right to conduct operating activities on the well.

by Eric Fox

investopedia.com

READ MORE - Natural Gas Industry: An Investment Guide