close to 52wk low. what's wrong?, page-17

Unfortunately AUT’s fundamentals are anything but solid. AUT have never made any money from their EFS acreage and for one simple reason – in any given quarter, costs are much greater than revenues.

Earlier in the year, Marathon decided to scale back their 2013 drilling program in AUTs acreage, and this has provided a good test of the economics of the EFS.

The reported production rates from Dec-12 to Mar-13 remained steady at ~ 19,000 boepd net to AUT. however, AUT reported that Marathon had brought 36 wells on stream durign this time. These results illustrate the massive decline rates of the EFS wells. At 19,000 boepd, 36 wells have to be completed each quarter just to offset the decline from existing wells and maintain production at existing levels. So AUT are forced to spend ~ $70-80million each quarter just to maintain rates and they see no incremental benefit from this.

During this period, AUT’s revenues were ~ $75/boe. However, the Canadian Financials reported costs during this period at ~ $100/boe (not inc acquisitions). Hence they made a loss of $25/bbl in this period.

This clearly shows that the EFS acreage is uneconomic at current oil prices and that the oil price required to make free cashflow > $100/boe.

So if AUT make no money on their existing EFS acreage, then it makes no difference if they go to smaller spacing or Operate on their own – at current oil prices they will still make no money.

AUT reported that Marathon were only completing ~16 wells in 2Q 2013. This may result in a significant drop in production rates for 2Q from the acreage Operated by Marathon, which may precipitate another price correction.

Current Mkt Cap is $1.3Billion which is still double the the post-tax NPV reported by Ryder Scott for 2P Reserves in Jan-13 and hence AUT still looks overvalued, with no sign from AUT as to when they expect to make any free cashflow.