Ann: Update - Consolidation/Split - AKK, page-40

@junior101

I read to the end of the thread - but choosing this post for the reply because it includes the most common misunderstood concepts of what bankers look for

1. Banks are regulated in the USA just like here and with the many failures of O&G companies (AKK and other companies like to highlight this) due to excessive leverage "secured" by poor quality assets the OCC/FRS has enforced stricter standards. Now those bank examiners (akin to our auditors) would have their hands full with larger loans and bigger banks and would likely never look at a bank with a loan amount that has AKK's name on it. The point is Reserves based lending has rules.

2. An independent Reserves Report contains much more detail than what AKK has made public. However, all you really need to know, is that BANKERS will provide Reserves Based Loans against the 1P PDP and a portion of the PDP. Non-Bank Lenders (NBLs) can do what they like.

3. PDP means it is the cash generating activity. PUD is cash consuming. You use capital to convert PUD to PDP and an appropriate debt facility is a useful source of capital.

4. Lets think like a banker does for a minute ... when they evaluate a loan
(a) Bankers are natural skeptics - its in their nature - bit like me.
(b) Bankers evaluate credit risk - its what their business is all about - they care only about being repaid the principal and interest and the borrower remaining complaint with the terms of the loan
(c) The evaluation of credit risk is Quantitative as well as Qualitative.
The top 2 (and more than 10 are reviewed) Quantitative measurements are Liquidity Ratios (and #1 there is Cur-Assets/Cur-Liabilities) and Leverage Ratios (and #1 there is Debt/Equity and equity would be average CSE from balance sheet for the period). Thing is, each of these comes with lots questions and my #1 would be related to the line item in the balance sheet called Total Assets. These many ratios are then sized to peers and also viewed as time series (at least 3 - 5 years past). Probability of default is estimated and still highly regarded is the Altman-Z score.
More skepticism follows and then comes the Qualitative evaluations. Google 5 Cs.

5. Bankers, surprisingly maybe, do not want to take possession of "collateral" and who could blame them, especially if the pledge is a "potential" oil field. Trying to reference a LTV ratio for that is like pointing to 100's of farmland in Sydney's southwest and saying imagine the value of all the homes and commercial businesses there ... and ignoring the capital needed to get it to that point. I do not believe that Pathfinder has the necessary features for bank loan collateral.

6. Would a bank participate in "Project Finance" (as opposed to Reserves Based Credit Facility). Maybe. But the #1 thing there is, prospective financiers ONLY evaluate upon the merits of discount cash flow models. Meaning you really do need some certainty surrounding the Cash Flows behind the loan.

7. Would a NBL (not the National Basketball League) come to the party. Sure why not. BUT an NBL will demand an equity like rate of return and not a debt like rate of return. AKK gets its capital but at what cost?

Now Banks and NBLs have also gotten ahead of themselves ... and that's why loans go bad ... resulting in them exchanging debt for equity and recovering pennies on the dollar. No one is perfect.

Good luck.