Ann: Second Quarter Update Presentation , page-4

Hi Pisces, Slick

I wouldn’t be so confident. The data suggests that despite recent large increases in production, the acreage as a whole has marginal economics.

From the quarterlies, current operations expenditure to date has been $240million and receipts have been $122 million. They are a long way from making a profit on full cycle well economics basis and these costs don’t include the acquisition costs to date, which are a further $295million.

Net Earnings after Tax were ~ $14/boe last quarter and has been declining since production started, which indicates that the existing AUT acreage is a low margin oil business, even at current prices. This netback could easily be wiped out by a $20/boe fall in oil prices.

The problem AUT will have is that their borrowings are based on large reserves estimates, the majority of which have yet to be drilled. AUT will be forced to keep drilling even if the wells are uneconomic, otherwise they will be in collateral default. But if you’re making a loss each quarter, there comes a point where you can’t afford to drill anymore. At that point you need to keep borrowing or raise capital by selling assets. Petrohawk and now Chesapeake found themselves in this position, but were saved to a certain extent by a massively inflated asset acquisition by BHP. These assets were subsequently written off by BHP as uneconomic. See below for more on this.

http://www.theoildrum.com/node/9397#more

Many people think that the real value in AUT is in the longer term, so they are prepared to take some high CAPEX pain now, for gains later. However, the history of US shale oil tells a different story. See link below to understand what’s happening to the Bakken oil shale play in the US. This play is now declining fast despite large capital investments, and will likely produce only a fraction of what the reserve auditors were originally hoping.

http://oilandglory.foreignpolicy.com/posts/2012/07/27/the_weekly_wrap_july_27_2012_part_i