Very difficult to guess what the company might be worth. By...

Very difficult to guess what the company might be worth. By coincidence, I happened to review yesterday. These are my musings (only), prior to today's announcement. Decided to post in case holders find any tidbits usefull.

Funding from Gemini Oil & Gas Fund II flashes 4 warnings.

1/ The facility announced 21/09/2010, without stating the interest rate. Such a massive rate is the single most important fact to be disclosed imo. The CEO and directors can't be fully trusted to make full and balanced disclosures of all important info. Now know the effective rate is 84%pa, quietly buried on page p81. Imagine that 84% won't compound annually. Might pay to check.

2/ Lochard Energy Group Plc also guarantees the Gemini funding repayment, seemingly regardless of who owns Zeus. Must have been in a grossly weak bargaining position (at the time, may have since improved), to agree to pay 84% and this clause. Lender must've required this because of some uncertainty as to who will be the final owner of 50% of Zeus. The litigation claim is for A$15.4m plus interest and costs.

Cash but...
LHD held a lot of cash as at 30 June, yet in the annual accounts the directors/auditors make a point of stating the Zeus litigation is a material uncertainty and that failure would cast significant doubt on the group’s solvency, risking forced asset sales at fire sale prices.

Debt costs this year
By 30 June 2011, Zeus had drawn down A$11.3m, already incurring $5.1m of interest, making $A$16.4m repayable at that date. LHD forecast repaying $20.7m this year, which looks like mainly the existing balance plus accrued interest – ie will cost this with minimal further drawdowns. And working it through, the just announced 2 month slippage adds prima facie $3.4m of interest to the facility cost.

3/ Suspect no option for early repayment of the Gemini advance. With the business sale, at 30 June LHD had $12.5m in cash plus receivables of $15.5m (= $28m, adding only the business sale receivable). Presuming this wasn't all committed, why would you hold any cash and not repay the loan costing 84% pa. Suspect it's because most or all the interest/loan is repaid as a royalty on production. Production is needed, otherwise interest just accrues. Someone might be playing this. Ithaca Energy Inc would've been the obvious party re the 1 Sept 2011 unsolicited interest. Discussions continue to 8 Nov 2011 when terminated on price. On 9 Dec 2011, Ithaca unexpectedly announces a 2 month production delay, which hurts LHD by $3.4m by my calc. Encouragement for LHD to reconsider a sale?

All up, LHD forecast it will cost $30.1m to repay, from of Athena's gross oil revenues (now say $34m with the production delay). Could this all come from production over say 2 years. Forecasting initial 2,200 bpd net to Zeus – say it averages 1,500 bpd over 2 yrs = 1.56mbls (from the total of 2P 2.44mbls). Must generate $22/barrel after the usual royalties, operating, admin, and further exploration costs. Looks feasible, though always surprised how costs soak up revenue, especially offshore.

4/ If accept the company line, this financier is being paid 84%pa for massive project risk. Yet the loan is full recourse, so the financier will stand in front of shareholders for repayment. Following that logic, what sort of annual return should shareholders require, given their risk has to be greater than the financiers – 150%pa?

The CEO owns 16.4m shares (6.6%). On the other hand, most were acquired cheaply and he pulls $460kpa for running an operation with 3 employees (of which he is one) and minimal operating responsibilities (they don't operate any field themselves).