Rancher's SEC filing 22/7/08 makes interesting reading....

Rancher's SEC filing 22/7/08 makes interesting reading.

http://www.sec.gov/Archives/edgar/data/1287900/000114420408041174/v120377_424b3.htm

Some key points about Rancher are:

1. Rancher is not profitable at the moment
2. It has two CO2 contracts, one with Exxon and one with Anadarko. It is in doubt whether it will be able to start accepting CO2 supplies because it is way behind schedule with project development.
3. It looks like a major problem lies with having to construct a CO2 pipeline (last I remember was almost 100 miles and costing about $100M).
4. Rancher's fields are not as suitable for CO2 injection as Grieve.
5. Rancher's reserves are 1.3M BO. There is no mention of 3P. Did they actually get certification of reserves or was it just an estimate?
6. The JV partner announced in Feb was going to fund $83M but has since pulled out.
7. They have big funding problems and borrowed $11M last Oct secured against their properties. The loan is due this Oct and the lender may seize the assets if Rancher defaults.

They have contracts for about 100mmcfd of CO2 from Anadarko and Exxon. My thoughts are that if Rancher goes bust or can't accept the CO2 when it is due, then that CO2 will be available to other oil producers.

Maybe Rancher’s loss will be ELK’s gain!

If Rancher fails, then Exxon will be under even more pressure because all that CO2 will have to be vented and Exxon may be penalised for that. They will want to sign up with another oil producer to take Rancher’s place.

ELK’s approach, although frustrating at times, has been more conservative than Rancher and I much prefer that, especially in today’s investment climate.

Also, ELK is at least making good cashflow from SDS (enough to cover operations) and it didn’t pay $89M for its oil fields like Rancher did.

Here are some of the relevant exerts:

In December 2006, we also entered into an agreement with Anadarko Petroleum Corporation (Anadarko) to supply us with CO2 needed to conduct CO2 tertiary recovery operations in our three fields. In February 2008, we entered into a Carbon Dioxide Sale and Purchase Agreement with ExxonMobil Gas and Power Marketing, (ExxonMobil), a division of ExxonMobil Corporation, to supply additional CO2 to the three fields.

Due to difficulties in the capital debt markets, fixed term debt financing has been unavailable to us to develop our fields. In November 2007 we began to explore strategic alliances with experienced industry partners under which we would assign a percentage of our interests in the three fields, in exchange for the partner’s investment in the fields. We executed a letter of intent with such a partner in February 2008, the terms of which called for the investment of up to $83.5 million to earn up to a 55% interest in the fields. That letter of intent expired on April 30, 2008. We subsequently entered into a second letter of intent with two different parties which included similar terms for the development of the fields, but which also included provisions for the construction of a pipeline from the source of the ExxonMobil CO2 to our three fields. Due diligence and formal contract negotiations are ongoing with these potential partners. Under the terms of the letter of intent, because the parties had not entered into a definitive agreement by June 30, 2008, either party may terminate the letter of intent upon ten days notice.

We borrowed $12 million in October 2007, which is due in October 2008, and granted to the lender a mortgage on our interests in three fields and our other assets. We used a portion of these funds to increase oil production and for working capital. We do not have cash available to repay this loan. We plan to refinance this loan and borrow additional funds to pursue our business strategy. There is no assurance that such funding will be available, or that, if available, the terms will be satisfactory to us. If we are not successful in repaying this debt within the term of the loan, or default under the terms of the loan, the lender will be able to foreclose one or more of our three properties and other assets and we could lose the properties. A foreclosure could significantly reduce or eliminate our property interests, force us to alter our business strategy, which could involve the sale of properties or working interests in the properties and adversely affect our results of operations and financial condition.

Our contracts with our CO2 suppliers include significant take-or-pay obligations.

Our existing contracts with ExxonMobil and Anadarko contain provisions under which we are required to take delivery of certain volumes of CO2 or pay the seller for the volume difference between the required quantity and the volume actually purchased. If we are unable to secure sufficient financing to construct a pipeline and to develop and prepare our properties for the injection of CO2 we will be unable to take delivery of CO2 and our cash position at that time will not be sufficient to pay for the take-or-pay volumes.

We have incurred losses from operations in the past and expect to do so in the future.