PW - you may be right.
There is something more here IMO that will come out. Italics are quoted text.
Let me just draw shareholders attention back to the annc of 28 Apr 2015 - where the "company secures $1.5M reserves based loan" to drive low risk growth. Please consider the following:
1. "...Funds allocated to drilling low risk, low cost conventional wells..." - this of course is Colorado, Kentucky and Mississippi, "...that remain economical due to lower drilling costs, in this low oil price environment..."
2. The RBL is securitized by AKK's assets - and typically this is mostly 1P PDP and some of the PUDs. Going just on the 1P PDP, from the latest investor preso that's 269,844 Bbls oil net to AKK. Round numbers of $10/bbl in ground value and 70% LTV is about $1.8M - so the bankers stake is covered. KEEP IN MIND that bulk of Reserves coming from EFS - so selling that means paying back bulk of the loan.
This RBL loan, while just requiring interest only payments is reviewed every 12 months and is due for REPAYMENT APRIL 26, 2016 ,
The bank itself notes that "...out intent is for this to be a long-term relationship between our two companies and we will be looking to increase this line as Austin's production increases further..." - motherhood and apple pie and banks don't want to be operators of O&G properties, but how has/is AKK increasing production?
3. From the prior Qtrly, in reference to the PEP JV and the 2 wells "...should the well hit oil then Austin will pay for the completion costs of putting the wells into production..." thus far #4 appears to be a gas well.
Sooooo, maybe the dice roll was, the PEP JV drills for oil, makes the discovery, AKK uses the RBL to complete the oil wells, increases production and reserves and the bank is happy, the JV is happy and a 10 JV well program commences.
But in the game of craps maybe AKK has rolled a 7 and out and possibly what has occurred is:
- Oil not found in JV wells
- AKK does not increase production and reserves
- Bank gently reminds AKK that repayment is due April 23, 2016 (6 months away) perhaps signalling intent not to renew.
- AKK now needs a dilutive issue (something they said as late as Jun Qtrly - so July 31 - "...drive its growth and cash flows, and doing so without dilution to shareholders...") to raise cash to fund drilling to hopefully make an oil discovery and keep bank happy (or happier) and also possibly to repay the bank sooner to escape liquidity trap it is in.
- As signaled in AR (pg 71/72 (c) Liquidity Risk), apart from rights issue to raise $3.3M the company is also considering mezzanine financing to fund further development. Guess that's almost a foregone conclusion
IMO that's a sizeable problem (looming repayment) given current circumstances. Why would anyone take the shortfall when in effect it appears to be needed for debt repayment. Of course a doubling in oil price removes the problem as the security just got more valuable (and saleable I guess).
Just some thoughts to consider.
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