Ann: HY2015 Half-Year Results Presentation, page-17

Thank g12mO.

So up-shot is on balance of probabilities static conventional oil production in the next 2 years and not enough capital to be able to grow gas business to a profitable scale without dilution to shareholders.

Last half Underlying Net Profit After Tax down 42% to $32.4 million based on an average realised oil price for the period of $105.40.

If oil stays around $50 a barrel for the next six months (even with their hedge program the likelihood of their underlying profit increasing is very low IMO). Even if the POO recovers to levels close to the upper end of their hedge position $90 (which is less than the av. realised price over the last 6 months) it would still be difficult to see their underlying net profit improving over the next half IMO. So I can't see much hope for DLS's cash position if oil stays below $90 and they keep pursuing their gas strategy.

Not totally clear on the convertible notes. Annual report states:

"US$125 million convertible notes (the “Notes”) were issued by Drillsearch (Finance) Pty Limited, guaranteed by the Company, on 3 May 2013 and 13 May 2013."​

"convertible into Drillsearch shares at an initial conversion price of US$1.66 per share"

"On conversion, Drillsearch may elect to settle the Notes in cash or ordinary shares in the parent entity. Based on the current conversion price , the maximum number of shares that could be issued on conversion is 75,301,205"​

Not clear on how these notes work. From the last statement above it would seem that DLS has the power to decide if the notes are converted or redeemed. But you also have this statement in the annual report.

"Holders have the right to have the Notes redeemed on or after 1 September 2016 for a certain period of time and / or where certain prescribed conditions are met"

Can anyone shed any light on what this statement above means? and also is the "current conversion price" referred to above, the same as the "initial conversion price" in the statements above or does the conversion rate change with a falling share price, that is does potential dilution increase with a falling DLS share price.

Either way if price of oil doesn't increase to above $90 and DLS keep throwing money at gas (without any substantive profits in the next 3 years). They are either facing a potential major cash depletion or a substantial share dilution. If it is truly up to DLS to decide between conversion or redemption, then dilution IMO would seem inevitable. If it is up to the note holders to decide then we will find out a lot about the DLS business at that stage. If they take the money the company will become a horror story.

IMO I can't see anyone wanting to take over DLS unless they see major potential in the gas assets and have the money to develop them in the longer run. I don't think companies are going to be gambling on oil/gas prices at the moment. Name of the game for all players at the moment is to put houses in order.

DLS is starting to lose a little shine in my eyes and I'll be factoring that into my longer term trading strategy on this stock.

Eshmun​