This is the unwinding of the BLACK MESA backin after payout.
BM as the operating company has 2 backin after payout rights.
1) A 25% WI backin after payout for all exploration/ development projects like SWISH, STACK, non operated leases and Orion exploration like Juanita, Norman
2) An 18.75% WI backin after payout for all production assets like the Orion production Thelma, Carter, Lee .
This structure was formulated to keep the USA based direct BRK wages costs to a minimum by having the US executives and team paid by BM, and minimising BRK equity dilution by having the USA based executives receiving incentive equity in BLACK MESA rather than BRK .
The BM executives own 50% of BM for which no funding on their part was required ( sweat equity) . BRK originally owned 15% of BM and the Tulsa Equity Group ( TEG), comprising of a group of season Tulsa oil men ( DP mentors) owning 35%. BRK and TEG provided the seed capital of US$3.126 million ( funding equity) split 30/70.
BRK now own all the funding equity, after acquiring the TEG equity for no cost during covid. TEG received ~US$1.2 million from BM cash account and handed their equity to BRK, who now have board control and are deemed to have full control of BM, so BM for now are consolidated 100% into the BRK accounts.
Apart from the lower cost benefit, the main effect of the BM back in has essentially been to ensure that the projects BM have originated and operated for BRK have been tier 1 projects. Because the back in is only triggered after a project is paid out, ie) BRK have to recoup 100% of ALL their project related costs, drilling, completion, land leasing, legal etc, it has been in the interests of the BM team to only put up the best projects they can find for BRK to acquire and fund. For example, if BM originate a project for BRK that costs US$10 million to develop, takes 4 years to payout and only generates a surplus after payout of $4 million, there isn't much of an incentive return to the BM team. BM would only be entitled to $1 million in total , and since BRK own 50% of the BM equity, the net return to the BM team would be 500K.
So , is this deal a good one for BRK and its shareholders, and is this deal a good one for the executives. IMO it is a win/ win for both. Firstly , for the executive team, it essentially brings forward a good portion of their incentive payments, which will be quite a bit lower than previously, but paid earlier with the 7 cash installments and then a long tail 1.3% royalty on the SWISH production
For BRK,
1) It locks in the team till at least all the SWISH is developed or monetised.
2) It only now applies to the SWISH assets
3) The back in was acquired at a steep discount to NPV ( rough back of the envelope work out to follow)
4)Will make any future JV or partnership deals on SWISH or future assets cleaner as the purchasing group will not have the 25% back in to deal with.
The total cost the BRK in cash paid out of production cash flow is 7 xUS$618,000=US$4.326 million. The installment period hasn't been specified ( not that I can tell) , but I assume it's quarterly.
The 1.3% royalty is based on the reserve which should be close total 11.9 MMBOE ( after taking production depletion into account) which is ~ 154,700 BOE, which will take ~20 years to produce on the typical steep decline. At a net margin of US$ 40 per BOE that is another ~US$6.2 million over ~20 years. The NPV on that is probably ~US$2.5-2.8 million.
So on the complete monetisation of the SWISH asset through production under the new scenario , the BM executive team would receive ~US$10.5 million over the lifetime of the asset, with an NPV of ~US$6.5-7.5 million. Not applying a discount on the cash installments as they will be paid quickly.
What would have the BM payout been on a full cash sale of the SWISH assets had they been sold in a deal acceptable to BRK.?
DP always stated that a full sale would have to be close to the NPV, most like with a 20-30% discount.
The NPV10 of SWISH at the last reserve report and valuation was AUD$254 million, so the NPV was $282 million. A sale at a 30% discount to NPV would have brought ~$198 million in cash ,assuming no tax on the sale ( for ease of calculation) As the SWISH "project " hasn't reached payout yet, Flames, WP wells are close and still have all other costs to recoup. We have no information on how much is yet to be recouped( might be in the annual report but i haven't checked at time of writing) but I would estimate ~$8 million.
So with $8 million to be recoup for SWISH payout, BM would be entitled to 25% of $190 million , or $47.5 million, and BRK would be entitled to $150.5 million.
But we are not finished. BM are 50% owned by BRK and that ownership still needs the initial $ 3.126 million paid out of BM to it's funding shareholders before the BM executive team can receive any cash payments. The TEG group received ~US$1.2 million when they departed which leaves ~US$1.9 million ( ~AUD$2.9 million) owed to BRK.
If BM decided to distribute that cash to shareholders BRK would receive the first $2.9 million, leaving $ 44.6 million... The executives would receive $ 22.3 million, and so would BRK, for a total distribution from BM of $22.3 + 2.9 million = $25.2 million.
The final breakdown of the sale proceeds would have been BM executives $ 22.3 million, BRK $175.7 million.
Under the above scenario, the BM executives would have received more than double than under the new deal. But there was no sale and monetisation is now full field development.
Had the current structure persisted through the DSU FFD then the BM back in wouldn't have kicked in until the FMDP paid out fully, which could have been ~$30-32 million ( BRK costs), which would possibly take ~12 months or into late 2026. The BM would have picked up 25% of the ~65% BRK WI in the project ( ~16.25%) By that time production may have fallen to ~1500 BOEPD ( 12 month average ~2000 BOEPD as per the FMDP announcement) so BM would be entitled to ~ 330 BOEPD and declining.
This scenario would be repeated with each DSU development . The BM team would have received significant revenue income in steps over the next 3 or so years . The BRK production profile would have shown an equivalent drop in revenue as that production was attributed to BM ( albeit mitigated by 50% coming back into BRK through equity accounting)... it would have been an untidy picture and quite confusing. Calculating what the production scenario and WI payments to BM may have looked like in detail is impossible with no information of the future DSU developments.
To recap
The deal is a win/ win for all parties. The BM executives receive accelerated incentive payments, the sum total which however will be ~ 50-60% less than under the old structure.
BRK tidy up their structure, saving corporate , accounting costs, and making future deals easier for attracting new partners . They acquired the back in at a very significant discount to NPV , whilst still maintaining the team in place till at least the completion of the SWISH development.
Hope that all makes some sort of sense.
cheers
Dan
BRK Price at posting:
1.1¢ Sentiment: Buy Disclosure: Held
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