PDC and Natural Gas futures

From now through December 2008, natural gas futures are over $7.50. Maybe they should be at $4.00. PDC should do well even with future drop in prices. Their business depends on being able to lease drilling rigs that they purchase or build in such a way as to get back their out of pocket investment in the rig with the first 2-3 year contract. Those contracts will keep coming as long as drillers can hedge their sales against a future drop in prices, in order to cover their lease with future production. If the natural gas market holds up, PDC will be able to command a huge premium for the rigs that are coming off their contracts from 2-3 years ago.

PDC is at $13.29. They have $1.73/share in cash and no debt. Their operating cash flow is $2.40. Their P/E is at 10.3. But that's not the true story. They reinvested $128 million in the company last year. That's 19% of market cap or $2.56/share. Their price times cash flow is 4.8, which gives an internal rate of return of 21%.