debt agreement?, page-26

Back to debt ... this follows on from that post regarding RFE. Now this is not about RFE (I don't hold and there is no cross promoting) - its about a small company managing debt funding in a high production decline play.


RFE releases it 6 month financial report

^ Revenue growth: Revenue increased by 43%

^ Positive EBITDA: EBITDA profit of US$10.1m

^ Production growth: Six month production of 573.8 mboe - growth of 35% September 2013 Qtr and 41% December 2013 Qtr.

^ Group net 1P reserves increased by 33.4% to 18.6 mmboe

^ Reserves value: NPV 1P reserves more than tripled to US$277 million (up 210%) in the 12 months to Dec 31, 2013.

You could almost be excused from further reading of report.


HOWEVER, on pg 47 in Note 1 to the Financials you have the disclosure that while it is in compliance of loan covenants as of Dec 31, 2013 it expects to breach certain loan covenants as at Mar 31, 2014.

OK - wonder which ones

On page 68, and I recommend you read this page.

In summary the credit agreement completed on 6 Nov 2013, up to $150M with initial borrowing base $100M advanced. 4 Year Term with Interest rate of LIBOR plus 8.5%.

They highlight a "minimum interest coverage ratio" and a "maximum leverage ratio"


While not specifically calling out those 2 covenants as the ones that have been breached they note they have received a waiver and that they are in discussions to reset the covenants. Rapid change of events given it was only done 5 months ago.

This is where it becomes a little tricky.

For instance what measurement would they be using for Maximum Leverage Ratio. Doubt its a simple Debt/Equity ratio. Might be more like a Debt/NAV (and NAV only on 1P PDP??) or Debt/EBITDAX maybe.


Remember PVA (the company that acquired most of MHR's EFS assets). Here is a release from them that describes their credit facility

http://files.shareholder.com/downloads/AMDA-1PYQVM/0x0x649771/0520eba4-1277-4be7-99c8-095395cc3f58/PVA_News_2012_10_1_General_Releases.pdf

"The maximum leverage ratio covenant was amended in the New Credit Facility to allow a total debt to EBITDAX ratio, as defined in the New Credit Facility, of 4.50 times through December 31, 2013, 4.25 times through June 30, 2014 and then 4.00 times through maturity."


Likewise on the interest coverage ratio - see release from Quicksilver resources
http://investors.qrinc.com/releasedetail.cfm?ReleaseID=807941


Interesting to see RFE simultaneously release a annc of sale of a portion of undeveloped acreage to "strengthen the balance sheet".


This is why I make a big deal out of small companies taking on Debt. The production has to deliver (else EBITDA falls) and you have to keep drilling (due to decline) to keep the EBITDA growing until you get over the hump.


Hopefully NSE will follow the style of annoucement from PVA when they sign off on their debt agreement.