The Elephant in the Room, page-2

Hopefully that post made sense and also my posts describing FB operations program and also all of the notations concerning the MOB Credit Agreement. There is vital information there for shareholders.

There is a lot to digest that is very specific to SSN ... just don't be blind sided by the macro issues that are bigger than SSN.

The second elephant in the room for SSN is the Senior Debt to EBITDA multiple covenant.
Both of these elephants have the potential to sink SSN if not achieved in the Jun Qtr. I have to stress that reading and understanding the details I provided in post# 17464485 is essential.

There is a reason why I was looking for second opinion production figures from @Rob79 - that is core to getting a reasonable EBITDAX estimate. We are in rough agreement on the oil number and then the implication going forward comes from the hedging statement.

From the Hedging Update announcement we have been advised:
"... approximately 75% of total current production including the acquisition has been hedged from May 2016 to April 2018..."

I'm going to use a simple flat distribution of hedges.
(a) Collars: 147,462 BO hedged over 24 mths which equates to 6,144 BO per month
(b) Swaps: 113,925 BO hedged over 8 mths which equates to 14,240 BOper month

Therefore we have 20,384 BO/mth representing 75% of total oil production

Implied monthly oil production is 27,179 BO/mth

Thus the estimate for June Qtr existing oil production only (NS/R+FB producing wells) is 81,537 BO.

Now we all hope SSN is able to quickly get a workover rig on site and complete the Round 1 works program ASAP. In my FB Operations post# 174447617 I took a punt at what might capital has to be spent and what production could result given what SSN told us. For Round 1 the production estimate was ~9,000 Bbls of oil in the June Qtr.

Puts the estimate for total oil produced in June Qtr at ~90,537 Bbls.

This isn't as comfortable as first thought. I've crunched the numbers and they come out in the table illustrated below. To make it really easy to understand and see the risk, there is a low/med/high oil production number for the Qtr and then a sensitivity to the oil price.



And now the Sr Debt/EBITDAX multiple est. This assumes that the Sr Debt has been paid down to $20.5M.  Red numbers are bad (meaning above 4.5x and covenant breach) and green is good.



Bear in mind this is an estimate and could be way off given that SSN hasn't issued a proforma with any of the important variables being advised. We can however estimate:

a. That G&A will not be more than $750,000 for the Qtr (per MOB covenant)

b. production taxes are effectively 10%

c. LOE is a bit of guesswork given the multiple fields. However just NS/R in the Dec Qtr was $1.1M. What I've used, perhaps foolishly, is a flat $1M for NS/R & FB in total. I expect service costs to be coming down as well as with the FB acquisition came 2xSWD wells so that helps. A word of caution though, if I used $1.5M as LOE its a fail across the board and the Oil Production

d. Used a sliding scale of -$7.50/Bbl at low to -$8.50/Bbl at high for the Bakken oil differential.


What this also highlights is companies with stressed balance sheets - like SSN - cannot "curtail production". They have to produce as much as they can as soon as they can because they have to meet the covenants ... and MOB made them more restrictive (there is no cosy relationship there sipping whisky and smoking Cubans in a steakhouse).

So IMO those are the 2 absolute critical things that have to happen:

1. Friendly to existing shareholders equity raise.  e.g. by way of preferreds as outlined
2. Must meet or exceed to high end oil production estimate AND have oil average GT $45 for June Qtr.

GFTA.

Additional disclosure... may close my long position upon further DD.