Hi mate.
SHE basically were set up to acquire Lone Star Energy which had the back in rights to BRK projects. That was going to be not only for the BRK operated assets ( through BM), but also for the non operated STACK assets that BRK didn't want to fund any more. The STACK are very good producing wells, but BRK only got into those the " train" themselves to become operators of their own projects, as they did with the SWISH.
Essentially, SHE were to fund BRK drilling via well bore only farmins and take the PDP reserves and cash flow from those wells . The well bore farmin mean't they wouldn't have any other interest apart from the well. BRK would forgo the cash flow from the wells but keep all the PUD reserves, which they would monetise via sale of those PUD reserves.
BM being the operating company have the technical strength and talent to work up the projects which are pretty well all development in nature. BRK are the project recipients and funders where by they pay all the acquisition costs of the acreage , legal admin to get them to a drillable status. The original plan was for SHE to fund the drilling outright and benefit from the cashflow. BRK were to benefit by not issuing equity to fund the drilling, forgo the well cashflow but gain the uplift in land value , which would be monetised via sale, JV etc. BM would benefit because they would back in for 25% of all the assets BRK funded, but only after the projects paid out. BRK would also benefit here this as they own 50% of the equity in BM.
So the original plan was for SHE to be the production company and have the cashflow but need to raise equity until cashflow increased to a level to be self sustaining/ funding. BRK were to be the asset holding company, not dilute by issuing cheap equity for drilling but benefit from asset sales after revaluation when PUD reserves were proven by the SHE funded wells. BRK cash flow would be very lumpy, but significant upon the asset sales.
But SHE decided they didn't want to go down that path further after they finally agreed to fund a portion of Jewell, rather than the full amount, and then declined the opportunity to fund Rangers, and after that, were not invited to participate in Flames.
So yes, it is , or was going to be a triangle as such until SHE decided to go their own way.
To answer your question, BM are going to be a growth asset for BRK because BM are effectively a mini BRK, of which BRK own 50% of. Every BM originated asset BRK agree to pick up will be split 75% BRK, 25% BM of the BRK WI. If BRK have an initial 100% WI in a project, after payout where BRK recoup all their invested funds, the BRK WI will be 75%, and BM WI will be 25%.... If BRK initial WI in a project is 40%, after payout the WI will be BRK 30%, BM 10%. This split will be at the well level and DSU level. Most of the projects will be either in house generated DSU's or PDP property acquisitions.
After payout BM will be receiving significant cash flow from it's WI in all the projects. It will benefit not only from the cashflow from the wells but also from the WI in the DSU's and their subsequent revaluation after drilling which BRK will now partake . The more projects BM originate for BRK, the more assets will be built up within the company.
Now, this is the kicker. BM ownership structure is 50% BEK, and 50% BM executives, namely Giroud, Francis and Schummer. The incentive structure whereby BM get the 25% back in only AFTER project payout means BM will want to ensure they originate tier 1 assets that will payout as fast as possible. There is is no point for BM to have BRK invest $10 million into an assets that will only return $20 million in it's lifetime, and take 10 years to payout, because BM will not get any cash for 10 years from that project. This is why the velocity of capital return is key for BRK and BM. Both want payback to be as fast as possible, either through production, or through asset sale.
The other important " kicker' is the BM executives won't get any distribution from BM until after BRK get their " payout" from their initial capital investment in BM, which is now US$ 1.8 million.... and there almost certainly won't be any capital return to BRK until BM hold enough cash to be able to fund their WI in the BRK assets.
For example, when Rangers pays out, BM will back in to 25% of the 78.69 % WI in the Rangers DSU or 19.67 %. This means for the Wolf pack well, BM will need to fund 19.69% of that well, and BRK will fund their 59.02% WI. This process will repeat for all BRK wells and DSU's when those projects reach payout. BM will need to stump up for cash for their WI, and will get the same benefits/ rewards as BRK.
But, because the BM executive payouts are dependent on the success of the projects, all their hard work will go unrewarded if BRK and therefore BM don't grow substantially..... and they will not receive a distribution, until after BRK receive the first US$1.8 million.
So for example and ease of calculation only, ( no guess on value here) if BRK sell the Woodford reserves across all DSU's for US$ 90 million , and there still is US$ 10 million for BRK to recover before total project pay out, the proceeds are split such that BRK receive the first US$ 10 million to complete payout leaving US$ 80 million. This amount is split 75% BRK, 25% BM or US$ 60 million BTK and US$ 20 million BM leaving BRK with US$70 million and BM US$ 20 million.
The BM board decide that of the US$ 20 mil, they only need US$ 10 million to fund their operations and retain some working capital leaving US$ 10 million for distribution to shareholders. Since this is the first distribution, BRK receive the first US$1.8 million leaving US$8.2 million which then get distributed 50:50 between BRK and the BM executive team. So BM executives share in US$ 4.1 million and BRK receives US$5.9 million.
Out of the US% 90 million proceeds ( ignoring tax liability for now)BRK receive US$75.9 million, BM executives receive US$4.1 million and US$ 10 million stays in BM ( of which BRK can also equity account US$5 million).
Hope that helps understand the BM, BRK relationship, and where SHE were to fit in.
Cheers
Dan
Expand
(20min delay)