Ann: Transforming New Standard Energy , page-122

No Muzaratti

I haven't been satisfied completely and haven't said my last word about these deals yet. Therefore I am not ready to vote "FOR" the resolutions of those deals in EGM yet.

The Morgans Broker Report summarises the whole deal and NSE's situation very nicely. You can find all the details in one place.

Even though Morgans report pulls up a positive result from this deal all together, I still have some concerns.

The Cooper Basin PEL-570 acreage is strategically located in an infrastructure rich, known producing region of the Patchawarra Trough with the primary target being basin centred gas and liquids rich gas. To have 52.5% share of this asset by spending $42.5m over the permits life and 15m shares (or even paying $2.4 outright is better) is definitely a good deal to me. I totally support this deal.

However I have concerns with Eagle Ford deal. Two things;

1)I am still trying to understand why MHR would sell a prime location to NSE! I am now reading MHR latest company presentation and can see that they are pulling out from the Eagle Ford shales as they have very little acreage there now, while they have huge holdings at the shales of West Virginia, Ohio, Kentucky, and North Dakota; Bakken/Tableland, Appalachina/Marcellus shales. I can see the whole picture on their maps and diagrams. (I'll give you the link and details later). So, it looks like (for now) that the Eagle ford shale could be a prime location but not good enough for growth for MHR which grows 16% a quarter.

We can also see from the posts of other poster here 9and also from the other sources) that the IP (Initial production) rates are quite good at Atascosa County, also the oil/gas ratio is in favour of oil in this region (as it is in oil window but not the wet gas) while decline rates are much lower than the other countries of Eagle Ford shales which has higher IP rates. That is OK too.

It sounds a good producing region up there at Atascosa County. it is highly probable that NSE will make good returns from the oil production over there.

2) However; It is my main concern that; is NSE giving away too much to MHR and putting itself a very tight financial pressure with this MHR deal? I can't see a expenditure and cash flow plan for all these things.

if the shareholder approval can be got, NSE will pay $15 to MHR upfront. Then NSE will have to spend $13m for the two Eagle Ford wells in Q1/2014. Then they will have to make a 3D seismic for Cooper basin, it is about $6-10m (I am not sure yet). Then the money has finished.

Then the 3rd well in Canning will be drilled but NSE will (should) not spend anything for it as the JV will put the money.

How they are going to drill Merlinleigh is not clear. there will be no money left.

However, they will have an cash flow from the sales of oil in US. 400 Boepd is the current production, plus if they can get at least another 300 in total from the new two wells, they can get about 700 boepd. That makes a profit of (US$40 net per barrel). if they can get this going for 6 months (180 days), they can make another $5m return from this.

But this is going to happen in very tight financial conditions.

Is it worth it?

3) The other concern is; We are giving to much shares to MHR. We didn’t have to give so many shares (up to 110 million shares). That is ridiculous. We could give cash over the time.

According to my research now, the land they are selling us
at Eagle Ford is not considered as a developed land despite there are 5 wells on them! So, why are we paying over $5000 is another question. There is an advantage here, that those two wells might flow 400- 500 boepd as they are in undeveloped area while the current wells are flowing at 80beopd (5 wells 400 boepd total). That would be great.

Then why we are giving so many shares to MHR is the biggest question for me here. I am not happy with that.

There might be other advantages of having a very strong and aggressive unconventional company like MHR on board of NSE. We can discuss them as well. But these are my thoughts at the moment. I am not 100% convinced about this deal. I am trying to digest it, but going well because of the questions on 2nd and 3rd items above.
I think, the biggest danger here is NSE is trying to dance with too many wolves; Conoco, PetroChina, and now Magnum Hunter. If NSE could get them fight with each other, that would be the best, if not they can eat NSE all together

I think MHR will target to takeove NSE at the end of next year. The takeover price could be around close to $1. I will not be happy as my target was much higher than that. The same thing happened to Queensland Gas Company and Arrow Energy in QLD cola seem gas business. BG Group first bought 30% (not sure how much was it now) of QGC, then bought it all at ~$5.3 after 6-8 months. Also Shell bought 30% of tenements rights of Arrow Energy, then they bought it all together with PetroChina for ~$4.75.

Here is the Magnum Hunter Res. Corporate Presentation – Dec.2013

See it yourself.

Is this Magnum Hunter wolf licking his lips because of NSE!