gge for dummies

I threw together a bit of information on one of my other holdings, CAP, last week and it seemed to gather a positive reception as well as trigger some healthy discussion for the overall prospects of the company. This week it's GGE's turn.




Grand Gulf Energy (ASX:GGE)
Market Cap(prior to SPP as of Jan 21): approx $5M

Overview

Grand Gulf Energy is a highly speculative micro-cap oil and gas exploration company that holds tenaments in the region of Napoleonville, Louisiana. The value of the region is a bit underestimated and the below diagram demonstrates that GGE are working in some hot property.



The company faced many challenges and hurdles throughout 2010, including, but not limited to, a high pressure well blowout, legal claims for damages, two dusters, exposure to high amounts of debt and a poor financial position. However in the late stages of 2010, the company began to make positive inroads towards making up for lost time with a successful discovery that brought on the first productive well in what will be a long and strunuous drilling campaign. This year, GGE looks to put their troubles behind them and start to walk the talk that their tenaments hold opportunity for large growth.

Capital Structure

Currently the company has dwindling cash reserves and a significant amount of debt; so management are looking to raise a large sum of capital through institutional and private investor support. Furthermore, the company is arranging to convert some of it's debt owings to various companies into fully payed shares. It is through these two courses of action that Grand Gulf will boast a much stronger financial position, however on the other hand the stock registry will face alot of dilution (the best part of 300% dilution). If the rights issue is fully subscribed, the stock will have a total of 1.1B options (about half will be listed for trading) and about 2.7B shares. Below is an overview of the assets, liabilities and funds that the company has as of 7 weeks ago, and will have in the hypothetical situation that the rights issue is fully taken up, and 50% of it's owing debt is converted to fully payed shares. The key things to take note of are the 'total liabilities' and the 'total equity' of the company. Both are a much better figure for GGE pro-forma.



Below is a summary of the debt conversion that will take place, and thus leaves GGE with a much smaller principle repayment to be made.



Management

The executive director of GGE is Mark Freeman. He is a chartered accountant and has more than 15 years of experience in corporate finance and the resources industry. Mark holds 20M shares, 10M options, 20M entitlement shares and 10M entitlement options. His remuneration for the financial year is $210,000.

GGE's chairman is Charles Morgan. He has founded many companies including Australian listed Nido Petroleum Ltd. Charles earns $48,000 per annum for his role and holds 79M shares, 79M entitlement shares and 39M entitlement options.

The other directors and their respective holdings and remuneration is displayed in the below tables. The total salary of GGE staff is approximately $380,000 per annum.




Damages of D&L1 Operations

Following the blowout from the drilling of D&L1 in the second half of 2010, some damage was made to nearby property and infrastructure. Fortunately GGE is covered for basically all of the costs of repair. In the company prospectus released a few days ago, the company made the following statement.

"The company confirms the Operator's insurance has paid out a total of US$5M and approved a further repayment of US$6M. The current costs in excess of this to GGE's account are estimated at US$2M which are expected to be covered by the Company's umbrella policy"

There is one final concern from this situation and that is of residents forming a law suit for various reasons (i.e. inconvenienec). The company highlighted in Chapter 6 of the recent prospectus that there is a chance of further legal proceedings to be made. The risk of this should not be undermined but so far no major claims have been made and this is a good sign.

Production

Dugas and Leblanc #2 (D&L2), 40% Net Stake

The drilling of D&L1 ended unfortunately but the blowout of hydrocarbons validated that the Dugas and Leblanc region is hydrocarbon rich. Following on from this situation, management made plans for a well to be drilled a few hundred metres away from D&L1; it was aptly named D&L2.

Having flowed at one stage at upwards of 320BOPD, the well has since stabilised to 90BOPD and 1.5MMCFD. Managment claim this equates to around 150BOPD, but they have used a very conservative MMCFD:BOEPD ratio. Sales figures from D&L2 will be released shortly, and it will be interesting to see just how much cashflow D&L2 is creating for the company.

Exploration

Dugas and Leblanc #3 (D&L3), 40% Net Stake

D&L3 is expected to be rich of gaseous hydrcarbons. In the below table (click thumbnail) it can be seen that the well is expected to have upwards of 300ft of net pay of gas columns, and about 10ft of net pay in oil columns. The net pay columns of D&L2 are also highlighted for interest's sake.



Drilling is expected to commence during 2011, and the chances of success are very high considering the nearology of the field.

Mound II (M2), 40% Net Stake

M2 is a high impact well expected to be drilled during 2011. As can be seen below, the well will drill into the deeper formation of the salt dome prospect.



These deeper formations are expected to hold a greater volume of hydrocarbons that will flow at a stronger rate. The shallow Cris R sands are expected to hold around 25BCF of gas and 875k barrels of oil. The deeper Marg V sands are estimated to hold about 50BCF of gas and 1.75M barrels of oil. Stabilised flow rates, if successful, are predicted to be more than the Dugas and Leblanc field, around 500BOPD and up to 10MMCFD. In a company presentation made in the late stages of last year, management made a very bullish claim that the EV of the well could be up to $270M. Considering the well costs for GGE are around $1.3M it seems like a very good risk vs. reward play for the company to be a part of.

Thibodeaux #1 (T1), 10% Net Stake(after project payout)

The biggest and riskiest well that GGE plan to be a part of in 2011 is also the one scheduled to be drilled first. T1 is part of the La Posada region which covers an area of 2899 acres in Vermilion Parish, Lousiana. This particular prospect will be drilled to a total depth of 19,300ft. The mean risked potential is about 10.3M barrels of oil and 302BCF of gas. The upside potential is up to 4 times this figure. The project offers great long term reserves provided it is a success. GGE's costs for this well are estimated to be US$1.1M. Given the well has projected sustained rates of 30+MMCFD and 1,400+ BOPD, this seems like another good risk vs. reward play for GGE.

Summary

No doubt GGE is a risky stock, theres no other way to look at it. But truth be told this is also a fantastic opporunity to get into a company pretty much at rock bottom with some big journeys to conquer in the coming months. The total costs of all three wells for GGE is about $3M, but the potential rewards in EV are at least $15M+ even if just one well is successful, and possibly much more if one of the high impact wells hits the production line. The key in the next few weeks is for management to tie up alot of cash to go about their business this year. As a final thought I'll leave you with this. Some may call GGE a 'dog' but I can tell you for certain that this stock has plenty of potential. For comparisons sake, look at where AUT traded in 2004. That's right, 1cent! 7 years later they are trading 270x this price. It goes to show that anything is possible if luck falls your way, and in the O&G industry, thats the key. You need the small things to fall your way for the bigger things to pan out positively. This is a boom or bust year for GGE, but given the nearology of their acreages, I expect at least some success to celebrate during the year. For more information, check out their Nov 2010 presentation, Jan 2011 Prospectus, or various articles on the company's website.