1. It is the banking syndicate(s) that need convincing. It is an ASSET VALUE (hedges don't help) not a CASH FLOW (hedges help) problem. Its like if you own a home that you purchased for $1M and borrowed at LTV of 80%. Luckily, home mortgages don't usually come with annual redeterminations. But say it did and the value cratered to $500M. I believe the bank would say repay me $400K now. I'm happy to continue lending at 80% (or that may get even more risk adverse and reduce that too). In that regard, if I were the banker the statement - "So upon review, I think at $35 oil, so long as SNDE can convince the financiers that oil will revert to $50 / $55 before our hedges run out, the defense to our PV10 can be ssomewhat supported. "
holds no water for me. The bankers primary responsibility is the safety of the loan.
2. The Mar'20 share price low was close to $1 or thereabouts - right? The gain right now is ~150% (reasonably in line with many other E&Ps ... even RDS was up over 100% from its Mar low). SNDE has participated in the broad rally. Looking at Oil Pricing - e.g.a catalyst to bounce to $40/Bbl, is good for the digestive system but predicting oil prices is as difficult as predicting currency prices. Rising oil price is good for all producers who can take advantage of it ... aren't we close to or over 100% hedged?
3. This area is probably my major divergence from what you're saying. Agree with reduced Capex reduces production due to natural decline. What also happens with lower prices is 2 other things. First some reserves may not be economic and that reduces reserves volumes (so price & volume both lower) that goes into the calculation. Second, because of lower Capex AND lower price, not as many PUDs converted to PDP AND are also removed from the 5 yr development plan requirement. This could have a much greater effect on the SEC standardized value than thought.
This really depends on how thorough the banking syndicate is. If its just price and remains just a price forecast model then you may win an cash flow based argument due entirely to the hedging program (kudos to SNDE). If its broader than that, and lets face it - what else is the Asset Coverage Ratio supposed to protect the bank from (yep a fall in the market for asset prices) - and the banking syndicate is concerned about the safety of the loan then there is a sizeable problem that only additional equity solves.
Bit like a rubik's cube don't you think? If you have a good relationship with EM, he should answer this question for you.
"What is the impact of a $1/Bbl decline in the price of oil (all else being equal) to your SEC Standardized Measure".
A fully complete answer address both $value reduction from a lower price per barrel of oil sold and also the volume reduction in reserves from changes due to price.
That data point would help understand the sensitivity to oil pricing that the company is facing in the current economic climate.
SEA Price at posting:
16.5¢ Sentiment: None Disclosure: Held
