Ann: Letter Of Intent Executed for Pathfinder Far, page-30

re: Ann: Letter Of Intent Executed for Pathfi... Hi Shelcomm,

Maybe you could ask GG - it really should be simple for them to answer.

1. How much has AKK spent on acquisition plus D&C costs for THEIR NET SHARE (don't want the gross cost) of the Pathfinder project.

My guess:
$2 - 2.25M on land (AKK say $200/acre)
1st well (Vert) $2 - $2.5M
2nd well (Hz) $5 - $5.5M

I'm going with $10M for easy math.


2. What was their expected D&C costs (they would have an AFE for the well) for next Hz. Prior to Farmout their WI was 85% so if their cost was $5M the gross cost is $5.9M

I'm going with a $7M Gross AFE plan for these wells.


3. Yes or no - did the Purchase & Sale agreement for Pathfinder require AKK to fund 100% of the 3rd well and 4th wells (Malmoe' point)


I've read plenty of Farmout announcements and many start with language similar to...

"AAA, closed a sale BBB, of a 40% gross interest in the Concession. As consideration, AAA received $X million from BBB as reimbursement of past costs of AAA in the Concession, and as additional consideration, BBB has agreed to: (i) pay AAA's participating interest share of future costs associated with the drilling ... up to a gross expenditure cap of $Y million, ..."


Once again a "Headline Number" captures the attention (as designed). So yes its a $12M cost to the Farminee but it is not $12M of value to AKK who is Farming-Out

A. AKK would have capitalized part of the Pathfinder Asset - so there will be a reduction in the Balance Sheet - in "exchange for cash"

B. "Exchange for cash" is not cash received - it looks to me as if that "reimbursement" is held back and added as "future drill carry" (but it is already AKK' money invested). If the investment to date was $10M then the 30% Farmout makes this "reimbursement" equal to $3M. Really should be paid as cash up front - since they are buying actual assets (Wells 1&2 plus acreage)

C. AKK's WI going forward is still 55% of any AFE (which they as operator would remain in control of) and the new Farminee paying 30% and existing partner paying 15%.

I've read that announcement many times now and key is Gross well costs for AKK 85% WI (so pre Farmin) at $6M per well. Any cost above $6M per well (above the 85% WI) is borne by AKK, so one would believe as operator AKK have the incentive to make sure that the AFE is no more than $7M Gross - which is $5.95M

FO partner bears 30% of the AFE - so $2.1M
FO partner carries 55% of the AFE - $3.85M (next 2 wells)
other partner pays 15% of the AFE - $1.05M

Costs that would have been paid by AKK is $7.7M. However since AKK is not actually getting the "$3M reimbursement" in cash but as part of the drill carry, then "new money" is really only $4.7M which as an investor is how I would look at it.

Thus $4.7M got the Farmout Partner the following:

- about net 3,000 prospective acres (but no Reserves)
- 30% of 1 well drilled but no intervals tested
- 30% of 1 well D&C proven flow but no firm production yet.
- 30% of net cash that AKK was using but they gave the range as $2.4M - $15.2M per well. The NRI of 30% WI is about 23% so net to FO Partner is min $0.55M.


And it is non-binding LOI. Note page 17 of the latest investor preso says "nearby acreage selling 4 times for what company paid" - so at $4.2M for 3,000 acres could say $1,400/acre - so 7 times their $200 stated cost.

Still on the fence with this one.

GLTA