am really nervous about this deal, and its indicated direction.
some points:
- if Macq Bank are selling, one needs to ask why
- why is it that so many small Aust O&G juniors are chasing plays in the US? there seem to be dozens of them. almost all of them are struggling. the only exception I can think of is Aurora. the others eg TTE, etc are really struggling. Why do these small players think they have more knowledge than the big US oil coys?
big issues for me here are:
- I invested in PGS because it was a C/B O&G coy, operating in Aust - not the USA
- a business investing in royalty in Royalty streams is a different business altogether
- almost certainly, Macq Bank will have taken a cut when they flicked this asset onto PGS- that might explain any perceived low interest cost
- no mention of interest rate on debt funding.
cost of royalty stream: US$4.58m
less PGS funds: $1.38m
debt funding: $3.2m
repaid $150k p/a x 5yrs = $750k = final pay't of US$2.6m = $3.35m
So does excess payments represent interest cost? ie $150k
$150k interest charge on a loan of $3.2m for 5 yrs is not a commercial rate.
So we are not being given all the facts here.
Those payments may simply be the repayment schedule of principal (ie exclude interest??)
I am not necessarily against this deal - it is out of the blue.
Investment and trading in O&G Royalty streams is big business in USA.
They also fund via project funding type loans on certified reserves - which is not common in Aust.
Maybe the PGS board has determined that because PGS has limited cash, it cannot fund a new exploration programme, either here or in USA, or buy meaningful interest in an O&G J/V, so this is the next best thing???
I guess the risks are similar to exploring for O&G?
theoretically it is same business, and PGS theoretically has the Board and mgt expertise .........?
So risks of this deal are:
- oil price - royalty will be based on sale price of oil I assume
- there is production risk- ie if Operator does not produce oil, then no royalty
- decline rate risk
- operator risk
- exchange risk
- country risk
- overseas mgt risk, legal risks (eg USA is far more litigious)
I am not sure if the ORRI is just over particular wells, or relate to permits. So if Operator drills more wells in the permits over which we have the ORRI,and produces further oil from those permits, does PGS get a 3% ORRI from those new wells???
I guess one benefit is that PGS is not doing any funding for Exploration, or incurring any "finders" risk in order to access a flow of funds from an investment in O&G.
As far as I am concerned, the jury is still out.
I can think of better uses of the surplus funds (in the C/B)
cheers
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