Gassed – let’s take a big step back for a moment and work this...

Gassed – let’s take a big step back for a moment and work this through. As things stand right here right now AKK is approaching a very interesting period regarding its funding and strategic options. I’ll preface all this with a massive ‘please do your own research and don’t make decisions based upon the following … if I were a genius I’d be on a yacht in the Caribbean instead of posting on this forum’. These are just musings.

The Pathfinder result along with the fact that is does have a small level of production and income generation places AKK in a somewhat unique position. As opposed to a pure explorer AKK may have the ability to enter into some sort of mez finance arrangement by potentially forward selling existing oil production and then PV’ing the value of the swap back to today and receiving a lump sum of cash. Such an arrangement (or a convertible bond / note – which I hate as an idea due to the dilution impact however I prefer it to an outright capital raising) would address the number one concern that existing and potential shareholders have around available funds and a CR lurking in the foreseeable future. I believe that the management (Cottee will probably be best placed to understand the funding arrangements) would pursue this path first up (hopefully as we speak) as a financial arrangement with zero equity issue would serve a number of purposes:

1) It would demonstrate that AKK is no longer a Hail Mary investment and de-risk the company as a whole;

2) It would send a message to any potential JV parties that AKK is not totally reliant on equity markets and the good graces of senior partners to get up and running (ie: AKK’s bargaining position strengthens and consequently the risk of a kneejerk sale of part of an asset reduces)

3) Will chill out existing and potential shareholders around the risk of a capital raising which should put a floor under the share price at the very minimum (in my opinion it would cause the share price to return to the lofty heights of 3.0c in pretty quick order;

4) The capital would enable AKK to move quickly to put in new wells in Colorado and get production moving.
As a result of the above, there is a chance that the share price would move to a level at which the options would be exercised before June – which of course would result in dilution (AARRRGGGGG) but at the same time potentially remove the requirement to sell down any of their assets and potentially scale up in Colorado a lot quicker than anticipated.

It all comes down to the timing and getting the correct sequence of events in place to achieve the above. If the above approach is so plainly obvious to me (and I am a self-confessed muppett of the highest order when it comes to the dark arts of corporate strategy) then I am sure it is apparent to a guru such as Cottee.

One last observation – it really galls me when people take risky positions in the market (particularly in derivatives) and then blame management for their losses or look for a way to change the rules. – it’s the investor version of smoking a cigarette in bed, falling asleep, burning their house down and then suing B.A.T. to compel them to pay for the house because the smoker in question didn’t get insurance. And before anyone jumps off the deep end - I get it. There are precedents for the changing of expiry dates on options - but there are precedents for the baling out of investment banks in Wall Street also … does it make it right? No – it gives rise to moral hazard and needs to be stamped out in order to have a level playing field for all. At the end of the day options have a finite end period and investors need to go into this with their eyes open. If I were to take a hardnosed management position on this I’d have to say ‘Well … at the end of the day option holders have no votes so I am not fussed … and get this … I can issue more options as part of a new carrot designed to lure in investors! It’s just like the magic pudding – options for everyone!!’ Is this legal – absolutely … is it ethical or right … well that’s subjective but my view is absolutely against this sort of position.

As I see it, there are a number of categories of option holders in AKK:

1) The holder of options before AKK management issued more options and they only hold options (you’ll have to forgive my accuracy as I was only aware of this category when Gassed brought it to light and I am not aware of the precise history). Did the management do the wrong thing by handing out free options as inducements when you paid for yours … legally no. Ethically …. well maybe (?) However this is a commercial entity – not World Vision so it is reasonable to assume that they will take whatever steps they need to take to progress their project and in the explorer space the aim of the game is survival. Generally companies only behave in an ethical manner when their balance sheets permit them too … just a general observation. This category of option holder I feel most for – however they may have noticed a Sell button in their trading platform that they could have hit at almost any time they liked.

2) Part options / part ords holders – At the end of the day you’ve taken a balanced risk and I think that what you have at risk on the options will be more than offset by gains in the ords.

3) Punters who solely bought options with the view to selling them for a 20 or 30 bagger …. Guys … that sort of return has the same sort of risk as playing blackjack with a blindfold. You may smack the ball out of the park … but if you get caught surely you knew what you were getting yourself into.

Please don’t hear what I am NOT saying. Write to management, try and get your extension – more power to you but please don’t take the angle of saying that management caused your woes by issuing free options – legally they can do what they like. Most of all I hope and pray the price jags like a rocket and this is all a moot point.