This is some of the most in depth reporting I have ever seen the times do (aside from hacking into The Fabulous’ GS account.. see here: http://blogs.reuters.com/felix-salmon/2011/06/01/did-the-nyt-hack-fabrice-tourres-email/)
Although I have little experience in the space my quick take on the situation is as follows:
(1) Capital markets are rife with fraud. Whenever there is a technological advancement with a large element of speculation, it naturally attracts a boat-load of fraudsters.
(2) Oil & Gas E&P companies are, by definition, in a speculative business that typically attracts management who have terrible capital allocation skills and rarely make operating decisions based on creating shareholder value.
(3) Although some tertiary recovery technologies have been total game changers when evaluating the recoverable reserves from a basin, none of this is taken for granted by geologists. IE Even if you find land with decent porosity and flow tests are returning satisfactory results, you have to get the fracking and the co2/water/polymer injections just right to get a successful well— in general E&P companies are typically very promotional/optimistic when it comes to ultimate recovery projections, let alone decline rates for the wells that they’re currently drilling…
(4) I agree with the reporters research and assertions about accounting— most often the data the SEC collects are from reports by third party consultants— there is clearly a huge agency issue; e.g. with smaller E&P Companies, this is often a local geologist they pay a large sum of money to tell them the project has a super-high NPV (of course using discount rates to the tune of 5%!)
(5) Finally, most of the tertiary recovery techniques only offer positive NPV when energy prices are high. Adding further to the speculative nature of the investment.
The most important information I would want to know are the decline rate assumptions being built into the economic projections of the company’s project. I am sure there are shorts to be found. One of the most talked about situations is Northern Oil & Gas (and sister company Voyager). A friend of mine met with mgmt of NOG and said ‘I felt like I needed a shower afterwards.’ An wonderful overview of the situation is at Bronte Capital, an incredible blog:
http://brontecapital.blogspot.com/2011/03/northern-oil-and-gas-its-only-northern.html
