Some comments on the transaction. The first few are a response...

Some comments on the transaction. The first few are a response to points raised by Tuftman. Then I got a bit carried away – so apologies for the length (justified since this is an important turning point for LNC though).

The release states that the projects are currently cash flow positive. That does not necessarily mean that the purchase was made at less than the discounted cash flows.

ERG had pre-committed to expenditure elsewhere based on the sale of the asset. Thus they were possibly more than a keen seller, but less than a desperate seller.

Valuation differences between local Texas based companies and Linc can be attributed to exchange rate benefits. ERG would have only retained some of those benefits if there were multiple companies bidding for the asset which have had home country exchange rate appreciations against the $US similar to Australia. The competition would drive the price up. Tuff luck for local based bidders though.

Long term exchange rate forecasts for $A are for a depreciation of 15-20% against the $US. That will have a positive valuation impact thru the balance sheet if it materialises. The flip side is that repatriation of profit is reduced. But my understanding would be that those are just accounting entries. LNC would retain surplus cash in the USA for re-investment into existing or new assets.

The Royal Bank of Scotland financing required a 25% equity injection from Linc cash reserves. The Paribas financing is superior in that it is non-recourse to the parent company and will leave the parent company cash reserves in tact. I notice the headquarters was also thrown into the deal as compared to prior announcements. ERG have incurred capex leading to an ERG related oil announcement next week according to Bond on BRR. Hopefully an increase in bopd as compared to the initial deal.

There is a maturity to the structure of the financing and hedging (both oil and exchange rate) that I like. LNC is a transition company (both in size and activity) and the way this deal is structured suggests they are handling the transition well. LNC is transitioning from bank rolling its UCG/GTL objectives through coal exploration and asset sales to a process of bank rolling them via traditional oil exploration/production. Oil wells can be permitted and drilled within months. By comparison, coal exploration, mine applications and subsequent asset sales can take many years. The cashflow they generate is also lumpy and uncertain. It makes sense to take the path of least resistance to cashflow generation while you work thru technological and financial issues with the clean energy side of the business – not to mention while waiting an eternity for regulators to approve UCG activities. For those that constantly question the LNC business approach, have a look at CXY and CNX this year. Both have financed their UCG activities via dilution and neither are hedged against the prospect that their UCG ambitions may be thwarted by either regulation, technology or commercial reality.

Being non-recourse finance, LNC has purchased the right to walk away from the subsidiary in the event that things deteriorate. The loss would be the $US20m we paid for the Rancher asset, but most importantly, the LNC parent company is unaffected. The walk away option has come at a cost. 5 year treasuries are slightly more than 1%, compared to the 3.1% on the LNC facility. I think it is money well spent given world circumstances.

Roll over risk – It’s a $300m facility extending four years to 2015. I would prefer that only half of the facility is being rolled over for each non-recourse project. It reduces risk in these uncertain banking times and would also reduce the lumpiness of any call upon parent company funding if there were any short term trading difficulties that LNC did not want to walk away from. With Teresa as an asset, the royalty stream from Adani and $300m odd in the bank, you would have to think the parent company balance sheet looks pretty solid and now safely ring fenced from business risks associated with traditional oil activities.

I expect brokers should give this a thumbs up which may provide some additional momentum for the TA followers. I expect some price support or growth will emerge as the Teresa deal matures. The recent Wiggins coal terminal financial close and a possible transport solution (rail and port)both lead me to believe we may finally see a financial close on Teresa. Past potential buyers were looking at a stranded asset.

If you purchased down lower, a trailing stop will lock in profits and allow any upside to be captured. Seems like a sensible approach given European problems.

Good luck all.
Bleasby