The more I look at this deal the more it looks like the classic Nigerian email scam. You get a call from a foreign company promising a pot of gold if only you will send a small amount of money to solve a small immediate issue. You then find more money is needed and the deal is not as good as it first looked - and we still have the potential of the merger partner just folding.
First MEL was promised 2P reserves of 18.6MMBbls with an NPV of AUD95 million if only MEL could provide a small loan of AUD2.5 million deposited into ELK's account before Christmas. Then in the New Year after the money has been sent, MEL finds the bank account has been raided by ELK's mates who made off with AUD1.25 million and they were sorry but it would no longer be available to fund the proposed development.
Then a few weeks later MEL are told that yes while ELK did say that AUD2.5 million would be good enough, it will now actually cost a further USD10 million more. And yes I know we said that we had 2P of 18.6MMBbls but it is really only 12MMBbls. And yes the NPV will now only be AUD41.1 million not the AUD95 million that we said before - and that is only if oil prices double and stay at that level for the next 20 years.
Does this story sound familiar?
And MEL seems to have totally fallen for it. If it is such a good deal why have none of the (very intelligent and more intimately knowledgable) US Oil and Gas industry got involved and taken out ELK. Seriously, because the deal is a dog.
And as Jake has pointed out, MEL will now be operating in an area where we have no technical knowledge and a poor understanding of the regulatory and legislative risks.
For MEL the potential reputational risk is enormous. We take a oil field developed using multiple wells drilled and completed using 1960's technology that has been totally depressured and decide to pump it up again. There is absolutely no way to definitely confirm the integrity all the old wells but instead you go ahead and slowly pressure up the reservoir, cross your fingers and hope nothing pops. You only have to look at some of the problems Denbury has experienced elsewhere to become seriously concerned about whether MEL has anywhere near the expertise to analyse the risks associated with CO2 EOR. The potential for exposure to environmental damage claims in the US juridistiction is enormous. Most companies I know would walk over hot coals to avoid these exposures. I don't know whether MEL can even find insurance coverage for such risks anywhere in the world.
Can't even possibly begin to understand why our conservative directors would get themselves involved in these sorts of unquantifiable risks. Either they have been distracted by the potential pot of gold or have listened too much to Henderson (who might not even recognise the risks).
Denbury in the meantime is trying to convince their own investors that proposed changes to US regulations governing CO2 injection will not have any impact on their operations. It appears that the U.S. EPA is taking over regulation of CO2 as a waste rather than it being regulated as oil field practice. And I am sure that MEL would be all over the potential issues - (and if you believe that you shouldn't be in the market).
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I suspect our only hope is that the ASX rescues us from this new breed of Nigerian scammers and insists on an MEL shareholder vote.
(20min delay)