My guess . . . and really just a guess, because I continue to be surprised that the Elk share-price is plodding along in the mid single-digits . . . is that investors remaining asleep to the Elk opportunity is a combination of things. But that yes, Grieve first-oil-confirmation is probably the single most important key to unlocking value.
What follows is a long post. If you prefer short . . . even though this isn't my entire argument . . . here is my attempt to summarize in two sentences: Without Grieve' s cash-flow contribution, Elk's growth story would be stalled due to high-debt-repayment obligations. With Grieve producing as promised, Elk's share price will rocket to 20-plus cents by end February 2018.
Because don't forget that . . . besides money borrowed to fund purchase of Madden/Lost-Cabin and Aneth . . . Elk's contribution to reset of the Denbury production deal on Grieve meant committing $58 million - combination of (mostly) debt and fresh equity - towards first-oil production.
$58 million, one-time . . . versus more than half that sum as annual-profit from the Grieve-field, after netting off production and investment costs . . . is a pretty attractive opportunity even standalone. But until that Grieve oil starts to flow, the cash contribution remains zero. And Elk has become considerably bigger than Grieve-standalone, following the Aneth purchase.
Perhaps these 4 things are all relevant factors in the puzzle that is Elk's dismal share-price:
1 - First - the promises for upside from Grieve date back a dozen years to when Elk first purchased the asset there in 2005. Along the way, many delays and fumbles, causing market watchers to give up on Elk in complete disgust - leaving Elk for dead after the oil price collapsed in 2014.
Fair enough that Brad Lingo and his team seem to be the answer to those many years of problems . . . but also fair enough that Grieve is Elk's first-ever Enhanced Oil Recovery project.
Sure, most EOR projects are successful, but until Elk delivers this first EOR of their own, market-watchers may reasonably be saying "Show us the money first". After all, first oil is promised for less than 2 months from now.
2 - Second - and related to #1 - Elk needs the cash-flow from Grieve to make it possible to refinance its exisiting debt-commitments on cheaper and more relaxed repayment terms. Not to mention re-stocking the balance-sheet cash for further acquisitions, to grow Elk faster.
If Grieve oil is somehow delayed past January, Elk can still meet debt-repayment obligations from Aneth and Madden/Lost-Cabin. But there won't be a lot left over - in that scenario - for a couple of years, while premium payments to Resolute for Aneth ($35 million) get settled.
Add up all of these drains on the current $10 million per month of revenue: high-interest rates; rapid debt repayment terms for the Aneth financing; hedging of the first 4,000 barrels per day from Aneth at $50 to cover the bankers downside; and premium payments due for Aneth, resulting from WTI-oil prices above $52.50 per barrel.
3 - Third - Grieve by itself isn't really big enough to move the needle very-much on newly-upsized Elk. But recall Brad Lingo (plus his key lieutenants at DrillSearch) are deal-do'ers. They did 2-dozen-plus asset-purchases over 7 years in growing Drill Search's market cap from $100 million to over $800 million. Good chance they are salivating over current asset prices . . . champing at the bit to do more deals - once the Grieve cash-flow becomes reality.
This gets back to the Elk growth story is treading-water for the time-being, until first-oil (and cash-flow) from Grieve. Watch Elk then quickly announce several more doubling-down deals to grow further/faster. Again, I'm simply speculating based on Brad Lingo's history and all the "once in a cycle opportunity" language in Elk's recent presentation materials.
Brad Lingo's mantra - see latest Elk video - is 3 things: profitability, sustainability and materiality. If all he wanted was profitability, he could have just patiently sat on the Grieve transaction until early-2018, without taking on debt-risk for Madden and then Aneth. Aneth was about materiality - vaulting Elk from practical irrelevance in the market, to significance.
Since it looks like his market-timing instincts were excellent . . . with both Madden and Aneth looking like money-spinners purchased for bargain-prices . . . good for Elk and good for all of us holding shares.
4 - Fourth - Market cap still below $100 million makes Elk too small for most investment houses to publish research about Elk. Which also makes most institutional investors reluctant to consider owning . . . before Elk suddenly becomes flavor-of-the-month and lots of deep-pocketed buyers push the stock price up by 3 or 4 times to something north of 20 cents per share. That's my call on Elk - 20 cents per share by end-Feb if Grieve produces first-oil on plan in January-18 . . . and 25 cents per share by mid-August after full-year results for FY-18 are reported.
All of that is by way of explanation for how a company that is - since 1'st October 2017 - delivering $10 million per month . . . per MONTH . . . in revenue, still has a market cap below $84 million.
Necessary disclaimer here . . . I bought Elk shares at 7.5 cents and again at 8.2 cents - both times expecting the price to rise rapidly. Yet here we are, with low trading-volumes and a share price at 6-and-a-bit cents. Sigh . . . Still happy to remain long on Elk. I remain bullishly optimistic!
ELK Price at posting:
6.3¢ Sentiment: Buy Disclosure: Held
