Ann: Commsec Investor Update Presentation, page-16

Hi cmon

Thanks for your great response, like I said, you are one of the best.

I agree with your supposition we are looking at the same thing in a different manner in regards to FCF and after reading your post I think we are pretty well on the same page.

After all, the FCF of a company is the sum of the FCF of the individual assets so I do like to see what an individual asset throws off in cash within a portfolio as ascertaining the powerhouses as compared to under performers provides more clarity in analysing companies IMO. Obviously as you said the more assets/ projects in the larger companies makes this impractical but is pretty straight forward in a company like ELK.


In all honesty I hadn't heard of the RESIDUAL EARNINGS before and all I can say is if you value/ analyse your stocks by these methods then you must be some sort of genius.

For those others on the thread still reading I'll try to put up a simplified explanation.

1) RESIDUAL EARNINGS are defined in terms of equity valuation as the income generated by a firm after accounting for the true cost of capital...... sounds reasonable but what is the true COST of CAPITAL.

2) COST of CAPITAL depends on how the company is funded. If funded by debt then this is COST of DEBT.... If it is funded through equity then there is a COST of EQUITY.

Most companies are funded through both so you need to find the combined costs of both also known as the WEIGHTED AVERAGE COST OF CAPITAL or WACC.

To do so you need to consider the CAPITAL STRUCTURE of the company, for example if it is funded 60% by equity and 40% by debt then the WACC is the sum of the COST of EQUITY x 0.6 and the COST of DEBT x 0.4.

The COST of DEBT is total interest paid divided by total debt which for arguments sake will be 7% and this is pre tax.... to get the post tax figure you need to subtract the effective tax rate from 1 , and multiply the difference by the COST of DEBT.

are you still with me?

and we haven't worked out the COST of EQUITY yet but after completing your friggin accountant,s degree lets say it came out to be 11 %

So finally we get the WACC as (0.6 x 11%) + ( 0.4 x 7%) = 6.6% + 2.8 % or 9.4% PHEW ?

OK , now to the RESIDUAL EARNINGS calculation, should get pretty easy from here

BUT, ... here we go again .. in calculating a firm's RESIDUAL INCOME the key calculation is to determine its EQUITY CHARGE. WTF #@&% .. I'll might as well just blow my brains out right now


EQUITY CHARGE is simply a firm's total equity capital multiplied by the required rate of return of that equity,

or Equity Charge = Equity Capital x Cost of Equity


We have calculated the Cost of Equity at 11% , we are given the Equity Capital in the balance sheet etc,etc,etc


Read more: Valuing A Company Using The Residual Income Method http://www.investopedia.com/articles/fundamental-analysis/11/residual-income-model.asp#ixzz4eKYUiSah


As I said Cmon, if you do this then you are a accountancy guru and I bow down to you!


Your ELK exercise, mostly it will have to wait until Grieve is in production and we get a full set of financials.

However, from the presentations/ annoucements

All in cost BO (and it has to be 2p as I can't find a 1p number for Grieve ) is US$174/12.3 = US$ 14.... they say development cost is $7-10 so we have acquistion and pre development costs of $4-7 BO

The upfront cost of purchasing the put option to provide a US $45 floor price for 75% of ELKS Grieve production for calendar 2018 and 2019 was AU$5.77 million..

Grieve operating margin (including royalties) BOE ranges from US$ 27 at a US$45 oil price to US$41 at a US$65 oil price.

Madden all in cost would be the purchase cost and is US$ 17.5/71.3 BCF and is US$0.25 MCF PDP.

Madden has production costs of US$1.6 per MCF including royalties and production taxes for( 2017-2021) and capital costs of Us$0.3 per MCF for the next five years. These do not include maintenance costs .


About the only point I disagree somewhat with is your statement that ELK is like a shale company in field development stage. basically because the Shale guys have to keep on drilling US$ 8 million + wells which typically decline at 40% per annum . Once they stop drilling their production rates fall off a cliff. They do get their money back very quickly no doubt but invariably you have to be a big boy/girl to play in that game.

Gieve's decline looks to be in the order of 5% PA or so with no further wells to be drilled once production starts. As for Madden, there are no plans to drill a deep well ( US$ 50 million cost) any time soon ... they will consider it if the price of gas increases substantially ( Cost of capital at work here! )

Basically, what I am trying to say is IMO ELK, due to the fact it should have low sustaining capital costs for both Grieve and Madden, will have significant free cash after corporate costs and loan amortisation (will ask about repayments at the EGM ) to fund other projects and / or return cash to shareholders.


Would be great to have you on the team here one day.

Thanks and cheers


Dan