peeler ranch valuation - per well

Okay, finally got down to doing a proper NPV valuation on this deal.

If you rememember my post from earlier, the EFS needs to hit a Value of at least $30m (in present value terms) to be value acreative to shareholders.

I have based my analysis on the following assumptions.

Oil - $106.00
Oil Price Indexation - 5.00% per year
Discount Rate - 15%
NRI - 75% (Peeler Ranch)
Operating Costs - $84,000 per annum (based on 7k per well per month, from the presentation)
Operating Cost Indexation - 3.50% per year
Capital Cost - $7.0 m per well
Depreciation - 5 years (for tax purposes).

I have assumed that a Peeler Ranch well is able to achieve the following cumulative production curve (i.e. this curve is used to forecast my revenue projections).

It should be said that the following curve results in an EUR of 325k boe and has an abandonment time of 20 years.

Based on the above curve, the following cash flow projections are obtained (i have forecast out for 20 years, but have only shown the first 5 years).

You can see at 15% the Project achieves a NPV of $7.29M per well - or achieves an IRR of 62.80% (and this is before financing).

Next step, is to look at the financing cash flows.

The above cash flow stream is able to achieve 42% debt funding (based on a DSCR of 2.00 and cost of debt of 8.50%).
This means banks would lend $2.94 million (and NSE would have to put in about $4.0 million per well).

Based on 42% debt, and the resultant tax savings from (interest and depreciation) the following cash flow stream is generated (post financing and post tax) - ie. this is what NSE shareholders are entitled to.

This is for one well remember - so at 15% discount rate it achieves a $5M NPV and 88% IRR per well. Once the well is successful - the NPV represents the price that a buyer would be willing to pay (at a riskiness premium of 15%)

6 wells in themselves generate the NPV required to warrant this transaction.

I am happy with the above and have added to my position today. Now its just a waiting game.

The MAJOR risks to my well valuation are:

1. Oil price is uncertain (based on achieving +- $106/boe).
2. Production curve - assumes 325k EUR over 20 years - changes to this, change the revenue and val
3. Financing costs - assumes that banks are willing to lend 42% and at the costs
4. Foreign exchnage risks
5. Normal Design,Construct and Operations risks associated with any project.

Good luck to all - hopefully we see this deal passed and then its all up to the EFS.

DYOR of course - and make sure your investment suits your financial risk appetite!