Hi jtrain,The $76million represents the reduction in cash...

Hi jtrain,

The $76million represents the reduction in cash balance at the end of 1Q, excluding borrowings and acquisitions. It therefore represents the change in cashflow due to development and operational activities and shows you whether revenue from existing wells is supporting the capital spend on new wells.

Cash balance at end 4Q 2012 was $68m. Cash balance at end 1Q 2013 was $177m ($109m increase). However, during 1Q, AUT borrowed $300m and also spent $115m on acquisition (net $185 in the bank). If you remove these borrowings and acquisitions from the end of 1Q cash balance, you are left with the net result of development and operational activities during the quarter, which is minus $76m ($109-$185). This decrease in cash balance happens every quarter and AUT has to borrow to make up the shortfall, hence the wells are clearly not yet generating free cashflow to support the capital spend. Only their on-going borrowings are allowing them to continue to drill.

If you want to understand whether the wells have paid themselves back, the enclosed plot shows the accumulated full cycle costs vs the revenues. As you can see, the accumulated costs are ~ $40/boe higher than revenues and they are pretty much parallel since end 2011 – meaning that, at the moment, it looks like costs are not dropping below revenues. So when will costs drop below revenues? My point is that AUT has given no guidance on when this will happen.

As you say, the Chesapeake example shows you what happens when you over-leveraged on a shale play and have poor acreage. But they were also clobbered by the commodity price. The reason it is a comparable example is that Chesapeake also reported positive operational cashflow and NPAT for much of the time, but never made any money from quarter to quarter and the cash balance was entirely supported by borrowing, which was unsustainable in the end. Just like AUT at the moment in fact.

You are right that, if the wells have a long life, then they will certainly pay themselves back and everyone will be happy. But that is just an assumption and is not proven yet. In fact, data analysed from hundreds of wells in the Bakken and Eagle Ford suggests these wells will have an effective life of 4-5 yrs and much lower reserves than initially estimated (see page 90 of http://www.postcarbon.org/drill-baby-drill/).

I’m not suggesting that AUT can drill forever – what I am saying is that, if they can’t continue to complete wells at a certain rate which replaces the decline of existing wells, the total production will fall dramatically.

I’m arguing that the production and financial data to date indicates that the EFS wells are much less profitable than initially thought, so there is still risk with AUT – look what happened to the SP when Marathon announced they were scaling back their drilling program.