I initially thought the JV with Denbury was a bad one, giving...

I initially thought the JV with Denbury was a bad one, giving away 65% with no cash payment to ELK seemed a bad outcome. I always expected a JV partner would want a majority stake and become operator but I thought 55% would suffice.

As I have thought about it I have become more optimistic, 35% of something is a lot better than 100% of nothing. We can take comfort in knowing we have a major with vast experience in the industry now running the show. There aren?t many $25M companies on the ASX that can say they are developing a project with a $10B partner. Grieve will be developed on time and in the right way to add the greatest value to our shares.

Even as a worse case scenario where Grieve only produces 2,000 bopd, the op stays at around $85 and only 12MBO are extracted, ELK?s 35% share (700bopd) would be churning out an operating profit of about $10M p.a. (assuming production costs of $45/barrel). I believe these assumptions are very conservative but I?ve done that to show that at worse, ELK will have a solid cashflow for many years solely from Grieve. This type of money is more than enough to cover other opportunities as they arise for expansion.

I?ve also done some valuations for ELK?s share of Grieve:

1. $43M based on the JV, Denbury is spending $80M to get Grieve to first production and is covering ELK?s share of costs. That means Denbury is paying $28M for it?s 65% and this values ELK?s remaining 35% at $15M.
2. $134M NPV. This is based on the NPV previously produced by RS of $305M for all Grieve. ELK?s share is $106M and then adding back the $28M that it saves on capex (Denbury is paying for that) gives $134M.
3. If 18.6MBO are certified as reserves and these move to 2P (imminent), $15/barrel would give a value to ELK of $97M.
All the above are considerably more than the current sp without taking into account any other asset. Although we have to wait a little longer, I feel comfortable knowing that with Denbury as operator we will get Grieve into production next year and it won?t be too long before ELK is rerated.