This is an excerpt from this week's Oil & Gas Weekly which has...

This is an excerpt from this week's Oil & Gas Weekly which has difficulty in reconciling money spent on capex etc and revenue with resource plays in the US. The OGW cites Red Fork and Austex Oil. This is what it said about Red Fork:

"Since September 2011 Red Fork has spent $63,370,000 on project development production and operating. That investment has produced just $19,232,000 in revenues if we generously allow for a June qtr cash inflow of an estimated $6,000,000. In addition to the spend on project development production and operating Red Fork spent $14,369,000 on exploration, evaluation and leasing and another $9,858,000 on administration and other overheads in the same 18 month period.
All up negative operating cash flows for the period September 2011 to end March 2013 were $73,597,000. Red Fork survived by raising new cash $27,862,000 in the December quarter 2011 and an unbelievable $52,318,000 in the September quarter of last year at $0.67.

At the end of March 2013 Red Fork had just $11,849,000 cash left and a $20,000,000 financing facility to see it through the anticipated spend of $19,398,000 in the June quarter. Amazingly Red Fork’s brokers think RFE’s production numbers will enable Red Fork to increase its borrowing limits!"

Red Fork is a bit like the husband who tells his wife that yes he is making money in the market then topping up the family account with borrowings to keep the truth from her! If he can't turn the trading round he is in deep sheet.

So where is the value in Red Fork? Is it about to have a huge uptick in revenues? Given the company's record that's unlikely. Production is up but revenues aren't commensurately higher.

Are they a takeover target or about to sell some leases? Not sure they can. They don't own the mineral rights only lease them under tough conditions including 25% royalty, upfront lease signing fees and continuous drilling obligations. As the OGW says if the lessee is smart he will have also included a "no on sell clause" in the lease contracts.

Then there are plugging liabilities for the over 240 wells it is registerd with the OCC as the operator.

So a broker's analyst took an RFE paid visit to the Mississippi Lime play and returned to make a buy recommendation. Reminds me of that other well respected oil and gas analyst who went to Marion Energy's operations in the US and also made a subsequent buy recommendation. He no longer works at that broker.

At the end of the day if a company has to spend $2.00 or more to prduce $1.00 of revenue it is going to go broke eventually.