Just read something which if you think about describes what's going on - Alchemy!
Alchemy is a "magic" power or process for transmutation
Transmutation is changing a substance of little value to one of great value.
The present substance of little value is the FB acreage but specifically the PDNP Reserves.
The transmutation process is the method and valuation of 1P Reserves
The money to be made (or lost) might well be by "gaming the process".
I'm wondering if the following scenario has/is playing out.
1. SSN has already been "notified" that their existing BB of $19M will be in deficit. SSN put that effective language in their 10Q filing "...if this acquisition does not close... likely our borrowing base will be decreased ... need to repay outstanding amounts under the credit facility in excess of decreased borrowing base..."
2. Guessing the existing BB reduced to a (max?) ~$14.5M .... which would leave a $4.5M deficit
3. MOB is agreeable to $16M for the FB acquisition (SSN having already paid $0.5M deposit) and so "enables" to acquisition to proceed. This makes for a total BB of $30.5M at closing
4. TB/SSN are looking for additional funds to cure the present BB "deficit" which hasn't been formally notified because all parties are agreeing to close on FB acquisition
Now the "process" for transmutation is simple ... get the PDNP to PDP status. Nowhere (yet) has SSN stated the capital requirements for this other than implying they are minimal (which I agree as compared to D&C a MB/TF 2 mile lateral).
Per the prior FB acquisition update Feb 17, the PDP is $22.75M (and 80% of that is $18.2 and $16.5M is 72.5%). Same update puts the PDNP at $11.28M. Applying the 72.5% that's $8.8M
The great unknowns are
a. The funding to cure the current BB deficiency. Arguably this might only need to be short term (less than 1 yr) and maybe a simple $5M converting note with PIK interest and set conversion rate might be easiest solution.
b. How much working capital is needed to move the PDNP in a year?
c. Related to (b) how much EBITDAX now generated (have you got at least 50% hedged ... even at $42 that is good enough
IF that process plays out then FB BB collateral value alone might be circa $25M. Add in NS/B and just keeping it the same (i.e. at Strip not SEC) and you get a "magical" improvement and the removal of liquidity constraint.
All the above assumes oil stays around the $35-$40 range. Obviously above is more powerful magic and below it becomes poisonous.
GFTA
SSN Price at posting:
0.7¢ Sentiment: None Disclosure: Not Held
