As Danpech points out, the $35 million contingent upside (payable to Resolute) happens only if oil prices rise. Those conditions are:
Up to max $10 million (meter running at $40k per day), provided that oil prices exceed $52.50 for at least 250 days within the 12 months following purchase
Up to a further max $10 million (meter also running at $40k per day), provided that oil prices exceed $55 for at least 250 days within the 12 months following purchase
Up to a further $15 million (meter running at $60k per day), provided that oil prices exceed $60 for at least 250 days between the beginning of month 13 and then end of month 24 following purchase.
Keep in mind though, that the benchmark used for oil-pricing is West Texas Intermediate (WTI) - which closed Friday around $55.60 - well below the $62-plus dollar price for Brent crude that is all over the news reports.
My understanding is that if WTI prices remain around $55 for the 12 months from 1st October 2017, then there isn't a lot of upside for Elk shareholders, given that the first 4 thousand barrels per day are hedged at $50, and that prices up to $55 per day incur royalty payments to Aneth.
Beyond $55 per barrel for WTI though, and above volumes per day of beyond 6 thousand barrels, Elk shareholders enjoy an increasingly valuable windfall.
One more rough data-point: Resolute had (several years previously) borrowed $400 million, using the Aneth field as collateral for that loan. Fair enough that oil prices per barrel were higher then. On the other hand banks don’t lend against oil-field-collateral the way they do against owner-occupied homes (at say, 80 % valuation). Which is to say that in the recent past, the Aneth field was probably valued at something more like $800 million (or more).
$160 million plus-plus looks to be a compellingly attractive price. More so since the research reports from analysts covering Resolute essentially told Resolute’s existing share-holders they should be unhappy with the price obtained. The summary from one of those research reports is copy/pasted below.
Be patient, ya. Looks like Elk bought a promising asset that should produce long-term, for a brilliantly negotiated price.
Summary Resolute sold the Aneth EOR project in Utah to Elk Petroleum for $160 + $35 million.
The proceeds are to be used to repay the outstanding balance under its revolving credit facility, to improve the health of its balance sheet.
Between reduced general and administrative expenses and stock-based compensation, the company can save a total of $9 million in costs.
With the sale of Aneth, the company officially becomes a Delaware pure play and can finally have a dedicated focus on its southern Delaware operations.
A rational investor should not go overboard about the deal because the transactional price is near the low band of analysts' expectations
ELK Price at posting:
6.2¢ Sentiment: Buy Disclosure: Held
