transforming nse, page-30

Hi Anatol,

Looks to me like you have done your analysis and have come to the conclusion that the EFS is a good move. Kudos to you for digging deep and making an informed decision.

Now this will be a very long post - hopefully most will read it and think about implications.

Couple of summary points first.

1. Pearsall - we are agreed - it is very much in the future and so not be factored into any valuation discussion.

2. I agree that 200 MBOE as EUR would be probably a low case (see later). For round numbers I'll concede 200MBO (like saying 90% of 220MBOE anyway).

3. So call it 50 EFS locations and 10MmBO. And here is the danger in the math presented (yes other analysts have done this too). Paying $25.5M (umm I get $34.5M all up including success performance shares - that's the number unless you concede they will not be successful). That changes the math to $34.5M for 10MmBO or $34.5/bbl. But be careful, that is NOT RESERVES you are calculating its a resource. Great pity that the ASX thinks they are doing investors a favour to deny them (yes deny) the opportunity to review a certified reserves report.

4. $34.50/bbl of 1P PDP reserves is expensive for acquisition cost let alone for a RESOURCE. That is not a multiple that shows good business acumen by the acquiring company

5. You wrote "...EF is a shale formation which is homogenous and goes for hundreds of miles. The next doors to our acreage were drilled by EOG and the production was started which confirms the above number". Perhaps you misunderstand the rock geology (and I am not a geologist) but there are great variances in thickness and pressure and thus in recovery and production (said simplistically). This accounts for the very high sweet spots and the lesser valued acres.

6. EUR stands for Estimated Ultimate Recovery. It is based on the ARPS formula which allows for time to be infinity. And so there needs to be a cutoff applied. I did not want to post a decline curve & EUR with NPV but I have at the end to show it. So the Estimated part is just application of formula, the Ultimate part is open to debate (I tend to use 20 years but I believe NHR used 30Yr production) and the Recovery part is also open to debate - at what point do you turn the well off if its producing say 10 bopd or less. At $100 oil and $3,000 gross a month with just LOE to pay you would still produce. At $50 oil (not that long ago) you think twice.

7. And finally "SHALE SCALE" is why MHR exited. You said it yourself now too (I pointed that out a while ago on the video link I posted). They wanted out because the acreage in Atascosa is too small. (Ever wonder why EOG didn't want to buy this adjacent acreage to their Peeler Ranch acreage as a bolt on???)

Also with Comstock here are some quotes from their earnings conference call transcripts over time...

Feb 2011 Mack Good COO, Comstock Resources (he is referring to the Atascosa wells)
"But I can say that the results from our first two Eagle Ford wells that have some production history, the NWR well and the Rancho Tres Hijos well, are extremely encouraging. Based on our preliminary evaluation, we believe the EURs for these oil window wells will fall within our expected 225,000 to 300,000 barrels of oil equivalent range"

Now fast forward to a more recent call

Mark A. Williams - VP, Operations
"We haven't added any acreage up around the NWR and the Jupe, since the very beginning of the program. I think that was the first block of acreage we leased and then the early results in the area told us don't add any acreage up there until we can prove that we should. That's why we drilled the Jupe well with a long lateral to try to support the idea being able to add acreage up there because it's been available and we've turned down a lot of deals in that area,"

Think about that.


Back to EUR. Anatol, did you look at this piece earlier posted

http://epenergy.com/news/presentations/EPEOperationsReview_312.pdf

and very specifically slides 28 & 29. Their "Northern Acreage" is Atascosa county.

Their EUR 204MBOE (90% oil) very shallow decline, Capex in range $6M - $7M (like ours) and IRR of 10%-15% (oh no!)


I'll use the EUR of 343MBOE - roughly what MHR said (346 I believe) and which is above the success criteria of 325MBOE


I'm not sure how readable this is going to be though.....

Here is my calculated decline curve (to 30 yrs) that roughly matches observed declines in our area (not LaSalle, not Lavaca, not Dimmit, not Karnes, ...)

Based on that model you can do many things, the first being Capex recovery, NPV, PV10 and IRR

Again it a mass of numbers, but the important things are:

1. Assumed 90% Oil produced from model decline
2. Assumed $100 as price received for oil
3. All gas flared (no revenue for NGLs or gas)
4. NO DEBT - so no interest payment
5. The financial model runs 20 yrs - so EUR 293,767BOE
6. IRR is approx 20% remember though - no debt
7. Well Capex repaid 2 years 11 months (no interest payment)
8. NPV is $7.45M over 20 yrs production - OK hooray we spend $6.5M now to make total $7.45M over 20 yrs (that's net so Capex has been deducted). That ignores the time value of money
9. NPV10 is $2.53M

Now if you add interest payments because of debt the picture does change dramatically - say its 10% interest rate on $15M loan and repayable interest only annually in arrears with a balloon payment $15M year 5. Got to cough up $1.5M per year and $16.5M year 5. How generous am I!

Oh cash flow y'all say. OK yes indeed. The model spits out that Year a well produces net revenue (after royalty and LOE) of about $3.755M. And we have 2 of them so $7.6M in cash. Easy as. Yr 2 is 2 x $1.5M so $3M (and now half of revenue is taken away in interest). Oh but we drilled another well from the revenue we had left over from first 2 in year one (almost but we'll just borrow a couple more million to that $5M to make it possible)

Anyway hopefully you see the "treadmill effect". It will payoff with "SHALE SCALE". Does NSE have it?


All I'm asking from NSE is information like the above. They must have it.

Merry Xmas to all.