Looks like the quarterly has spooked a few people, you need to...

Looks like the quarterly has spooked a few people, you need to delve deeper to see the true picture.

Just assessing the current position would appear pretty underwhelming , Brad may have underestimated the market / shareholder understanding of their current plan.

The finances will be tight until Grieve is up and running and the refinance is complete. The current debt amortisation for Grieve and Aneth debt requires Grieve's $58 million to be repaid in three years, and Aneth's $98 million the be repaid in four years. Grieve repayments start presumably after production milestones are hit. At this stage Aneth is being repaid at $1.3 million per quarter but will ramp up soon.

So basically, your looking at around $20 million a year P&I amortisation for Grieve and $25 million PA for Aneth at the current 10% + interest rates. Looks bloody frightening and I nearly s#@t myself when I first became aware of this. Basically mean't that ALL ELK cashflow and then some would go to debt repayment with nothing else left over for anything else!

I questioned Brad about this at the AGM and his explanation was pretty well much as follows.

The Grieve costruction loan and Aneth aquisition loan were taken out at the very high interest rates and short term amortisation to keep the equity dilution to the minimum possible. The Madden , Grieve and Aneth assets are very long life , slow decline assets which as a package will facilitate a refinancing at much lower interest rates and much longer debt amortisation terms. It is Elks intention to refinance of the best terms possible, which may be a mixture of reserve base loan, bank finance and corporate bond or any other debt instrument which fits their need.

The advantage of a reserve base loan is there ususally is a limited principle remapyment requirement, bank finance has a lowe interest rate but faster amortisation, and corporate bond only needs the priciple repayed at the end of the term.

This will effectively mean the interest payments should at least halve from the current $ 19 million PA and amortisation could fall by $ 10+ million PA depending on the mix. Therefore, just the refianancing will free up between $15 and $20 million per annum. Brad explained that since the assets are basically 20+ year assets, you can spread the amortisation of the associated over a much longer period.

The $10 million deferred payment for this year and subsequent years is a negative,but, the unhedged 2000 bopd Aneth production will fund essentially fund that payment with the boost from the higher oil price. Aditionally, the Grieve production captures all the upside, and with ELK recieving 75% of the profits of the first million barrels, and 65% of the next million barrels...have a look at the projected Grieve profit per barrel from the latest presentation ( $40-45 a barrel)..

Please also be aware that , if the oil price stays at current levels or there about at 30 June, the headline year end result may be a significant loss ( multi tens of millions)because the outstanding Aneth hedges wil need to be marked to market. This will only be an accounting loss ,l not a cash loss .

So, what can screw the whole thing up for ELK?.

1) Obviously if the refinance is a dud and they cannot get the terms they want..... (unlikely)

2)The oil price tanks and they still pay all or most of the $10 million deferred payment, as the requirement is $40,000 a day for each day WTI is over $52.50 from closing date ( we are up to 150 days or so now)... ( not terminal but will hurt)

3) Grieve is a dud

4) Aneth development are a dud.

5) ???

If all goes to plan then you will expect to see ELK throwing off fairly significant free cash from late 2018, early 2019, but not before.


Hope this makes some sense.

Cheers

Dan