One of my favorite oil and gas plays is Harken Energy Corporation (AMEX: HEC). I have to confess that one of the attractions is the low share price (only $0.60) compared to its all-time high price of $70. Sure, it isn’t going back there, but maybe it could go back to its January 2004 peak of $1.30, which would be a nice doubling of its current share price.
Harken’s market cap is $134 million. This market cap has three components:
(1) $33.3 million net cash value.
(2) 11.9 million shares of Global Energy Development PLC (LSE: GED), which is worth $40.3 million based on Friday’s closing price.
(3) The rest of Harken’s assets, which we will call its enterprise value, is valued at $60.4 million. I believe that this stuff is worth more than $60.4 million.
Harken had $11.767 million of revenue for the first half of 2006. If we double that, we arrive at an expected $23.5 million revenue for the year, giving HEC an enterprise value/sales ratio of 2.57.
How does this compare to other oil and gas companies? Let's compare Harken Energy to Apache Corporation (NYSE: APA). I chose Apache because well known value investor David Dreman has been buying Apache. Apache has a market cap of $21.87 billion and $7.98 billion of net debt for an enterprise value of $29.85 billion. Apache reported $4.035 billion of revenue for the first six months, so we expect $8.07 billion for the year. This gives Apache an enterprise value/sales ratio of 3.7. Thus we see that Harken Energy is undervalued compared to Apache before we even look at production growth!
Harken has been rapidly increasing its production. Harken reported a 42% production growth since December, 2005. Small companies can grow a lot faster than big companies like Apache.