Debt is ok, as long as you can service the debt. Ultimately, to pay off the debt, you need free cashflow.
Good to see that, for the first time, AUT have stated when they expect to be self-funding – at the end of 2013 for the non-operated assets and by the end 2014 for the operated assets (page 7 of Aug 2013 presentation).
However, based on performance to date, it’s hard to see this happening anytime soon. Expenditures have exceeded revenues every quarter since start up.
Contrary to what Estseon says, there is no evidence that these wells are paying themselves off within 1 year. AUT certainly haven’t said anything like this.
But the uncertainty on the Operated wells will be affecting the SP, as Estseon says. Given that their new permits are pretty much ‘fresh pastures’, you might expect that AUT may have to drill a number of ‘duds’ before they hit the sweet spots. So we may initially see high expenditures and low revenues from the Operated acreage.
In August, AUT announced a reserves upgrade associated with the new Operated assets and updates to the existing non-operated assets. 2P Reserves increased by a massive ~30% to ~130 MMboe, but the sp didn’t appear to react much to this – why not?
AUT also did not provide the usual NPV valuation, which may be concerning. Since AUT have yet to make any free cashflow even at 20,000 boepd, and despite producing ~ 9 mmboe, it’s reasonable to say that the “Reserves” may not have the value that AUT are claiming.
Negative free cashflow and high debt is common to nearly all shale producers which is why there are many people now saying that shale oil/gas is simply a bubble.
The article below reviews numerous shale producers in the US and indicates that almost no-one is making any free cashflow, with operations and bank balances entirely supported by debt.
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