I hope that a farmout for the Niobrara will be announced soon....

I hope that a farmout for the Niobrara will be announced soon. We've been told everything is ready to proceed and consultants are being used to seek out potential JV partners. Depending on when a farmout is executed, drilling may or may not be during calendar 2012 but the announcement of a JV will be welcome news.

Recent lease purchases in the Niobrara formation have been as high as $3,250 per acre. These leases as far as I know are untested for oil. ELK has drilled into and tested the Niobrara at Grieve and experts calculated that a 65m oil zone exists. Horizontal drilling and fracturing are proven technologies for extracting oil from tight shales (if oil exists). We have oil and we will use the right technology so the chances are high that we can produce oil from this formation. The question remains, at what rates will the oil flow?

If you factor in the 65m oil zone and that much of the infrastructure is in place at Grieve, I would expect that something like the $3,250 per acre is achievable for the Niobrara. At 3,700 acres that comes to $12M. If we can farm out 50% for $6M, then pay $2.5M for our share of the new well, that would leave around $3.5M which can be used to drill a new well at Ash Creek for core samples and to test for updip oil accumulations. This would probably cost less than $1M.

If the Niobrara and the new well at Ash Creek are successful, the cash flow from these would be very nice with a high profit margin. If not then the remaining cash balance should be enough to see us through until production at Grieve starts or for us to secure some bank loan against Grieve.

New opportunities have been mentioned in recent announcements and as our cash balance is falling I would think we are in no position to look at new opportunities. Management must be optimistic that cash will be available from somewhere (a niobrara farmout or bank debt?).