Hi @cmonaussie, Limiting the amount of debt, increases the value...

Hi @cmonaussie,

Limiting the amount of debt, increases the value of equity in my model. I think this makes sense, since the cost of debt = 10%, which is the same as the discount rate (i.e. PV10).

So if we know PV10 is $750M (based on $56 oil), net of development costs and this returns you 10%, and we know the cost of debt is 10%, the more debt you use, the lower the overall value to equity

We know SNDE has $380M debt, so this leaves $370M equity valuation at oil of $56 - with 7m shares on offer ~ $50 val.

We also know that at $40 oil - equity value to SNDE is nil (if not negative).

So we are somewhere in between. There is no way an acquirer would pay the $50 (as the long term consensus is not $56 oil long term).

So coming back to your question:
If an acquirer were to purchase SNDE for $500M, what would be the return to equity, assuming 50% debt, 50% equity.

Very hard to answer for the following reasons

1. We need to know what the acquirer's projected cash flows are - I dont think it would be the PV10 projections (at $56 oil). If it were, then it would be as if we were in $55 oil environment, and I think we would revert to the valuations we were once talking earlier this year.
2. But if you want to start with the PV10 cash flows, and waterfall down by adjusting the cost of equity (i.e. premium to reflect the current uncertainty / volatility), then my questions would be:
   1. How much capex is required to unlock the PV10 (the orange highlighted cash flows) - your cash flows match the PV10 value of $750M, net of development - i.e. they are free cash flows to the project. So theoretically, the company is self funded. We know that this is not the case, so the PV10 cash flows would need to be rejigged - such that they still equate to $750, but have an upfront funding requirement

I guess there are two points I am trying to make

1. If the PV10 cash flows are what an acquirer was willing to pay for - i,e. believing in $56 oil, then equity value would be closer to $50
2. If the PV10 cash flows are not what an acquirer would pay for - need to know:
   1. What cash flows do they expect the asset to realise (presumably it will be much less than an PV10 of $750)
   2. What is the upfront funding requirement. To get the PV10 of $750, SNDE would need a funding source beyond the existing debt covenants. How much is this?

My issue, is the moment you diverge from 1 - you converge to 0. (Which i think is what you are trying to show, but differently).

So i agree, without $56 long term oil - $3.00 is looking great for us....and for me, I cant see a way out, other than a V shape recovery....

Basically $0 or $50

Eric knows this, and for some reason thinks that if it gets to the upstate (due to oil), management deserve an extra 10% of the company ~ $5.00 / share.

I guess the question we should be asking them, is if SNDE goes bust, do they guarantee shareholders get $5.00 / share

If the answer is no, why do they get $5.00 / share in the upstate?