2012 - 2014, page-14

Here is my analysis on where the sp will be in 2012:

I still use the RS certification of 18.6MBO 3P reserves. With all due respect to Denbury, their 12MBO estimate is based on an average 17% recovery which is the experience from their producing oilfields, none of which are in the Rockies. The RS certification came with an NPV of $305M. I think that figure is still current (if anything it could be slightly higher) and equates to $106.75M for ELKs 35% interest. The NPV calculation takes into account capex which ELK does not have to fund, so we can add back the capex component, 35% of say $80M for all wells, pipelines and infrastruction. That means ELK’s share of NPV for Grieve EOR comes to $134.75M.

A company will usually trade at a fraction of NPV during project development and should increase as milestones are subsequently reached (eg. in this case milestones will be EA approval, start of CO2 injection, first production, etc). Start of production usually means the project has been significantly de-risked but even then most companies will not trade at the full NPV. More likely they will trade somewhere between a range of 50-80%. That means once production starts at Grieve (say Sept/Oct 2012), ELK sp should reflect something like $67M-$107M for Grieve NPV alone.

By that time hopefully work on Ash Creek will have progressed with an approved chemical flood underway targeting 2-3MBO. Using an NPV of $15/barrel, that totals $30M-$45M in NPV 100% to ELK. If we calculate 50-80% of this reflected in the sp, that could be $15M-$36M in value by early 2013 when production is likely to start at Ash Creek.

I have completely discounted any value for cash on hand, by-passed Ash Creek oil, Hereford, the Niobrara, the oil pipeline or any thing else that ELK may get into. My guess is that theGrieve and Ash Creek EOR projects could value ELK at between $82M and $143M. Using the 152M shares on issue this equates to 54 to 94 cps.

I know this is a wide valuation, but that is the starting point of where I see the sp being in 12 to 18 months. Of course it can be a lot higher if we get some meaningful production of by-passed oil at Ash Creek, success at the Niobrara or something concrete at Hereford. There is also the potential in ELK acquiring old fields, especially if they are in the vicinity of the CO2 pipeline network or if they get access to those mobile CO2 units I’ve heard about.

A sp of $1 or more is not impossible within 18 months if things go to plan. With Denbury in control I am more optimistic of that happening than ever before.