Many thanks for the kind words expressed by some – I get it that...

Many thanks for the kind words expressed by some – I get it that many (?) don’t like data points or an opinion that can be interpreted potentially negative but as a shareholder (irrelevant whether I have 1,000 shares or 1,000,000 shares) I do detailed analysis from time to time – especially if it’s in an area I know something about. We all pay taxes to the Gov’t – some much more than others – and we only get one vote. Here on HC we are all equal – at the company EGM you get to vote your shares.

I WROTE THIS PRIOR TO NSE PUTTING OUT THEIR PRESENTATION THIS MORNING. I see I’m not too far off the EUR … will analyze it closely.

Before going any further to answer the question of “why do the analysis” (and I’ll try not to throwback any personal ridicule) is I’ve done it before so the incremental effort was customizing to Peeler Ranch FDP and the MAIN REASON is that I asked (the company) for details such as this (and haven’t got them). In addition, this is personal research. I do not warrant it to be error free (supplied on a best effort basis) nor accurate in estimating future events (such as actual recoveries, product pricing and so on). DO NOT RELY on my research to make your decision – DYOR!



This is an SUMMARY of the ESTIMATED Discounted Cash Flow (DCF) analysis of what Peeler Ranch only may be “worth” and the return that it delivers. I will post a detailed analysis of one model just so you can see the how it works out if that’s of interest.

I have highlighted 6 model scenarios under 2 different Debt funded drilling. It is up to the reader to determine whether those assumptions fall within what the company has announced. It’s also up to you to determine whether it makes sense or is realistic to those assumptions.
Bear with me as I walk through the basics:

In every model scenario I’ve used the same EUR (343,381 BoE) with “Recovery” cut off at 30 yrs (again a guess – many companies use 30 yrs, some 20 yrs and some even 50 yrs. Now don’t be confused here – the “U” stands for Ultimate and is not related to the “each well will flow over a life of fifteen years” – that is an MATERIAL ECONOMIC ASSUMPTION which I have also used in the DCF – cutting off at 15 years as in the CG&A report.

"10 additional EF well locations” as indicated by NSE – all having EUR 343MBoE following the same decline curve.
All 10 wells have a Capex of $7M each.

LOE have been lumped “all in” as either $20/BoE or $15/BoE. This makes a big difference. You need to understand that I’ve included Production tax (4.6%) the MHR Operator Fee(s) (min $500K year 1), all normal expenses such as marketing & transportation, waste water disposal and maintenance workovers. Keep in mind that someone like AUT in their last Qtr results had $5.68 Opex + $2.42 production tax plus $4.08 of G&A (so $12.18/BoE) on their gross received price of $72.81 BoE (not in the oil window). That’s about 17%.

Then there has to be a decision about how much of the production is oil. I’ve modeled 2 cases as either 90% of production is oil or 80% of production is oil.

The cost of debt is significant (even for AUT – Interest Expense is $8.25/BoE). I’ve modeled over 2 debt rates – one of 8% effective APR and the other at 10% APR. I would be really surprised if a better rate was received. Envisages a gross facility of $60M delivered over 4 tranches, because I opted to debt fund wells until enough cash was generated to drill (so last 2 wells did not need debt but used prior cash flows ).

Also drilling sequence was every 6 months – so D&C 2 wells in Q1 production begins Q2 then D&C 2 wells Q3 production of those in Q4 and so on for 3 more cycles.

And then of course there is the price of oil. The models all assume what I think is a reasonable “bullish” forecast for oil price which is $100 as average received for 2014-2016, $105 as average received for 2017-2018, $110 for 2019-2023 and $110 for 2024-2029. The biggest impact in DCF is the early years so a strong difference to that price in years 1-5 makes all the difference.

Closely related to oil% and oil price is what happens with the gas produced. Currently TXRCC reports (i.e. those filed by MHR) state gas produced at Peeler Ranch is flared. So ran a model for that too. (I see the new pres notes presence of pipeline).

And finally there are 2 producing wells on Peeler Ranch already. I had to make an economic estimation for their contribution based on the type curve.

With all that as background the questions that are trying to be answered is as Warren Buffet pointed out in the intrinsic value post:

How many birds in the bush? – 10 wells with EUR 344MBoE and all birds are the same regardless of where the bush is located.

How sure are you? – assumptions have been stated. Questions remain but (had sent 8 more last week) but the presentation released today addresses some.

How much are you going to get? That’s the PV number and discount rate (using either 8% fairly sure, 10% reasonably confident and 12% could a risky getting there).

But a $$$ number is kind of meaningless. Who cares if Peeler Ranch project over next 15 years generates $58,313,341 of net cash (that’s after paying back $73,388,062 of Debt and Interest).

Who cares if that future revenue stream discounts back to $29,445,457 in today’s money value.

Just like the poster with buying an investment property I’m interested in my yield over time. Since cash flows are not printed on stock certificates, O&G wells or acreage they tend not be as well known as you might expect. They do tend to be printed on long term property leases (or at on the one I have 5 year options with specific payments)

The Peeler Ranch picture is how much did it cost me to buy it? For me I include the price paid to MHR and the “commission” to OEH (although treated different in the accounts). With success case shares matched to EUR that’s about $31M and prorated to Peeler Ranch acres that’s about $11,150,907

So what yield (measured as a Compound Annual Growth Rate) did I receive (or better still – would I want) for investing $11.15M? Answer 6.69%

If I were to say to you – I guarantee you 6% CAGR yield return on your $11.15M so give it to me and in 15 yrs time I’ll give you $29.45M - would you do it.

OR

Alternatively if I were to say to you – give me $11.1M as I’ve got great acreage to drill 10 O&G wells in a proven area – and I’m pretty sure I’ll give you back $29.45M in 15 yrs time would you do it?

I just picked the best case for scenario #1 as an example.

There is one important final caveat in that this analysis does not include a “terminal value”. By that I mean things don’t just stop after 15 years – those wells are still producing and there is still oil to be recovered – so there is terminal value remaining. That really does need to get added back in as it would be a 1P PDP reserve. My estimate is that could be as much as 400MBoE to 500MBoE remaining and could fetch +/- $25-$35/BoE which discounted back to PV $ might be $10Mish that could be added. That changes my 6.69% to about 8.79%.

Same holds true in that NSE could sell the properties as fully develop after say 7 years – the return might be higher than producing them out.

That’s my opinion anyway. Hope all of it makes sense.

Here is the summary results.