Good morning Dan, Happy Easter to you also, Are we playing...

Good morning Dan, Happy Easter to you also,

Are we playing no-limit Hold'em and what is our position relative to the Button. Easy re-raise for me I think.

Perhaps we have a different perspective on FCF. After all it is possibly the easiest measurement of all to manipulate .... err manage. If you want to be FCF +ve simply reduce the investment being made into the business. General Electric was FCF -ve for many years in a row and yet highly profitable. At the same time they were making massive long term investments into the business.

I think the point of difference is I am looking at FCF of the company and it appears to me you are looking more at FCF of the asset (e.g. the Grieve EOR project) and how that plays out.

==> word of warning: Kenai Gas project providing the free cash flows (as it is/was (?) highly profitable (on EBITDAX basis and especially so with all the gov't incentives), that would be used to "...and the FCF these assets throw off to reinvest on new projects or pay dividends." You get my drift.

==> 2nd word of warning ... I do this all the time and mostly get it wrong ... it is a lot more difficult than we think to estimate cost of capital, WACC and expected return of a project within a company with multiple projects. AND ABOVE ANYTHING ELSE, NEVER EVER BELIEVE from a finance perspective what any company puts into its investor presentation that relates to single well economics or even field level returns. Theres much work to do to disassemble those numbers to "reconcile" to the company's financial statements.

Back to ELK,

I agree, unlike say FAR, it does not need an Exploration Budget. That puts them on the same level as every shale producer in the US. Shale plays are development. There are of course shale E&Ps who also do exploration (as in either looking to delineate new formations within Basins and also exploring Basins that have had limited exploration). In this respect the ELK producer and injectors carry 0 exploration risk and are equivalent to infill drilling of shale.

Argument can also be made for ELK that this budget is funded (equity and debt) for Grieve (and Madden) so its just a matter of executing on the drilling and tying into production these wells - low risk. Just as long as we are looking at EARNINGS (because depreciation is a real cost just like wages and banks don't lend money for free and retained earnings are not cost of capital free) and then RESIDUAL EARNINGS to determine the value being added to the company.

"Once the initial large capital is spent on redeveloping a field .... a highly and easily repeatable business model."

Dan I agree with you conceptually 100%. Also no different to say building LNG plants that produce at constant level for 40 years (not the upstream production of the gas feeding them) or oil sands projects which also use EOR techniques (am a shareholder of both COP and CNQ and so have read their filings for years). Again as long as we are looking at EARNINGS and RESIDUAL EARNINGS we can see how that capital is deployed initially and through the life of the project.

Just for the sake of the exercise ... can you calculate ELK's Grieve Field ALL IN COST of F&D a Net BO? This is important. How much capital was/will be spent in acquiring the asset (land, any infrastructure necessary to get production from field to sales location, any infrastructure needed to get CO2 to the field, all development wells, all injector wells, all future sustaining capital) to produce said 1P Reserves (and I mean 1P not 2P or any other number). Now make the all the deductions (including depreciation, interest paid, royalties, LOE, G&A). And now take what's left and calculate the PV using a discount factor that is fully reflective of the companies WACC. Also do the calculation on an unlevered basis.

Am I skeptical - you bet I am.

I'm also far more partial to "Madden" and kudos to BL for being able to negotiate such a deal. There actually an accounting thingy (I'm not an accountant) call bargain acquisition which allows the company to record a bargain purchase gain on the books (allows a higher book value to be recorded). Why is that important - because it raises the "Shareholder Equity" number in the balance sheet - always a good thing for common shareholders.


That's Chapter 1 following the authors individual forewords.

Regards