Thanks for your responses guys.
The reason for the question was to get a handle on what the expectations of the average BRK shareholder would be for the DIRECT equity position that BRK would have in the Jewell. A small sample size no doubt, but knowing the expectations of a few other holders gives me enough confidence to assume that most, of not all BRK holders are expecting a small % holding in the well verses a much larger ( possibly as much as 85% ) holding in the PUD that the well will prove if successful.
The purpose for asking that was to introduce the possibility that BRK may end up with ZERO direct equity in the well.
The reason this may be a possibility is because of the funding structure of the well, and the almost certainty IMO that BRK do not want to directly invest any cash in the drilling of the well.
THE ARGUEMENT
WE need to remember that the main reason for building an operated DSU position is to drill the acreage, which will enable conversion of the 11.6 million BOE prospective resource into a PUD reserve and capture a NPV10 value of ~US$65 million attributable to BRK's WI.
1) The well will cost ~US$ 8-9 million therefore a 10% WI interest will cost ~US $ 800-900 K
2) We know one group of the current funding partners are the original lease holders who didn't get pooled, will participate in the drilling and fund their share ( they include Continental Resources, Exxon and other small parties) and this group hold ~15% of the DSU WI. They will fund ~15% of the well ( US $1.2 mill- 1.4 million ) and will keep ~15% of the PUD reserve.
3) That leaves BRK, SHE and the SABO drilling trust to fund the remaining 85% ( US $ 6.8- 7.7 million)
IMO there are 3 possible funding outcomes.
Option 1) BRK fund some ( eg 10-15 %) direct equity in the well , original group fund 15% which will leave SHE and the SABO drilling trust funding 70-75% of the Jewell on a well bore only interest. This will result in BRK receiving 10-15 % of the direct gross revenue from the well, and 85% of the PUD reserve. This is the least likely outcome IMO because BRK will blow it's entire cash pile in this scenario , leaving no cash for the ORION project or any working capital and I am pretty sure they will NOT conduct another CR to fund participation.
It is unlikely they will sell any STACK A production leases as they are tied up in the drilling JV and the leasing facility , and selling their 300 net acres in the BULLARD DSU at this stage is also very unlikely, as RIMROCK, the operator would almost certainly be the only buyer and would not offer anywhere near the NVP10 value of the leases in the current climate .
So IMO Option 1 is a 100% no go
Option 2)
BRK fund 0% of the Jewell, leaving the original holders to fund 15%, SHE and the SABO trust to fund 85%. I am assuming the SHE % will not change as compared to option 1 , so under this scenario the SABO trust will fund a GREATER share than option 1. Here BRK derive no DIRECT Jewell production income but keep 85% of the PUD value .
IMO this is the most preferred BRK position
Option 3) BRK fund 0% of the Jewell, BRK bring in a funding partner to farm in of a % ( lets say 10%-20) of the Jewell DSU for a 2:1 free carry in the Jewell well, the original partners fund 15%, SHE fund their interest and the SABO trust fund the remaining , whereby their interest in the Jewell well is LESS than in option 1.
Under this scenario, BRK get 10-20% of the Jewell production, but give up 10-20% of their WI in the DSU and PUD , so their interest falls to 65-75%.
IMO , this is the second preferred option.... this would arise if either, the SABO drilling trust doesn't receive enough cash to fund remaining equity ,ex the original holders and the SHE equity, or BRK get an offer from a third party that they can't refuse which compensates them for the lower DSU WI.
Keeping in mind, BRK have control of Black Mesa, which have a 25% back in of the BRK WI (85%) in the DSU after well payout and all other costs are recovered.... this includes any interest that SHE, the SABO trust and a third party may gain from a farmout. So, BRK effectively will equity account a 10.6 % INDIRECT interest in in the Jewell well and the DSU, no matter which option ends up being the funding case.
This is the much unappreciated value of the the structure of the BM /BRK relationship.
Sorry again for the long winded post.... my primary concern was that there could be a negative response for BRK if peoples' expectations were that BRK would have a high direct exposure to the well, coupled with any disappointment if they were not aware that BRK may possibly end up with a ZERO direct interest in the well and not derive any production revenue.
The main game for the operated well pillar is getting the 3 DSU's drilled, with a well on each, not any production that may arise from those wells. IMO the above also needs to be considered for any further BRK participation in more than the first well in each of the Jewell, Rangers and Flames DSU's.
That is why the Orion project, and the production property pillar, is important. This is where the long term, low decline cashflow to fund the company is going to be generated.
Thanks for reading.
Cheers
Dan
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