Steer clear of Red Fork Energy or, at least, understand the unusually complex business model on which it is based
Steer clear of Red Fork Energy or, at least, understand the unusually complex business model on which it is based. Apparently outstanding short term growth in income is debt fuelled. Investing indefinitely at the same rate is needed to sustain output because the company's oil wells are very short lived. After less than a year or two, with its initial wells running dry, the company must access new wells just to maintain output. If the company runs out of land, capital dries up or oil prices fall, the leverage downward is potentially spectacular. How much should an investor pay for a company with debt of $200 million, limits on growth after the initial three year ramp up and future cash flows diverted to keep the model alive? Red Fork Energy has been reviewed and rated in the latest issue of PortfolioDirect/resources.
John Robertson is Chief Investment Strategist for PortfolioDirect a provider of resource sector investment stock ratings and portfolio strategies for mining and oil and gas investors. He has worked as a policy economist, corporate business...
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