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1.4¢ elk petroleum limited

Thanks cmon for adding your 2c, 4c + The comment on the scale of...

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Resurgam

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17/04/17

23:32

Post #: 24102789
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Originally posted by cmonaussie ↑

Still watching this one from the sidelines Dan.

@barrel81 ... O&G and especially the upstream business is extremely complicated and CAPITAL INTENSIVE. It is that component that brings most of them undone - the need for future development capital.

Don't worry too much about production profile and exposure to oil price price - that risk can be hedged.

Worry about the capital efficiency of the production and how profitable it is - (truly profitable none of this EBITDAX bull). What matters to all companies is EARNINGS.

So Dan, IMHO, EV/FCF is something the pay attention to in most companies - you don't want to pay too much for the cash being generated. HOWEVER, FCF does not create value for shareholders (what creates value is earnings about the cost capital).

I'd go as far to say, that FCF is almost irrelevant to ELK (as it is for any company that is required to make large amounts of investment into their business). Highly profitable companies can be FCF -ve.n

My 2c for discussion.

Regards

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Thanks cmon for adding your 2c, 4c +

The comment on the scale of production was coming from a fundie's perspective. If the fund was positive on the oil price you would generally want to maximise that exposure and look for those companies who would benefit the most those that have a large production profile.

I see it in gold producers, if you are not a certain size its very difficult to get investment from instos.

Thanks for the comments on valuation, I have a headache from it all but it is good to be familiar with these metrics

Originally posted by danpech ↑

Hi Cmon

Thanks for the input to the discussion .... As you are one of the best exponents of understanding the financial aspects of the O&G sector on HC, I am not going to argue with you , but to continue the discussion, I'll take your 2c and raise you 3c. Looks like I'm going to write that essay for barrel81 after all.

I totally agree with you point about profitability and capital expenditure etc . Highly profitable companies can be FCF -ve , but only for the short term because if their FCF was -ve over the long term they would have to continually finance that cash deficit with debt or issue more equity capital and that would eventually stuff up their profitability and financial metrics.

I regards to ELK , what attracts me to the company is that potentially unique feature the EOR business has as compared to other O&G companies in their use of capital to sustain the assets and the FCF these assets throw off to reinvest on new projects or pay dividends.

Firstly, ELK do not need an exploration budget, a significantly advantage ( highlighted by FAR ... despite the huge Senegal success the SP will be in the doldrums for years due to constant equity dilution up to production in 5 years time)

For ELK, one could argue that the purchase cost of acquiring end of life or depleted field could be deemed their exploration budget, but it should be be quite low, as usually often the current holders want to get rid of the asset because they are becoming uneconomic as conventional oil fields and to avoid the fast approaching abandonment costs.

Once the initial large capital is spent on redeveloping a field the sustaining cost of capital is very low, unlike conventional or unconventional O&G , where there can be significant development drilling to maintain production, in EOR there is almost no need to drill new wells to access the remaining oil, the major sustaining cost is the CO2 for injection. At then end of the fields life, even this remaining CO2 left behind is an asset because it can be reused for EOR in another field.

This is a highly and easily repeatable business model.

The Madden purchase is special, here ELK have a US $ 17.5 million asset, that at current gas prices will pay for itself in less than 2 years and continue to produce at a slow decline for the next 50 years. ... " you only get one Madden in a lifetime!" a quote from "Tex" Moncief Jr I believe.

I reckon that will do for now.

Happy Easter

Cheers

Dan

Expand

Thanks Dan for the essay. If Brad can get Grieve up and running it will at least provide a proof of concept for the business plan going forward. If there is a large growth story then that is very attractive.

I'm trying to find another similar company to ELK to help the valuation process / discussion.

As for further acquisitions, when would the best time be for that? Once Grieve has reached production status?

Also I noticed the last CR was at 7.5c. If the SP is below this next month there may be an opportunity for some to pick up some cheaper shares as tax loss selling sometimes has an effect. 6c seems the floor looking at the chart.

Happy Easter everyone.

ELK Price at posting: 7.1¢ Sentiment: None Disclosure: Not Held
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