Broker Update - Energy News Bulletin - Article

Oil production has begun at one of the production wells and RBC said in a note yesterday that it saw it as an important step in Elk's recent journey from having no production and holding one development asset in 2016 to now holding an interest in three producing assets.

Last month the company reported significant growth in reserves, production, cash flow and shareholder value in its first half year report.

The Grieve enhanced oil recovery project production is one of the de-risking steps on its way to refinance its debt position.

Economics are in the oiler's favour for the project's initial production period with 75% of operating profit for the initial million barrels to the company for its working interest of 49% (Denbury Resources 51%); this will drop to 65% for the next million and then to the company's actual working interest.

Now, the next step for the newly minted midcap is to refinance the debt it took on for its new acquisitions to now also be contributing positive cash flow.

"We view some of Elk's debt pile as reflective of pseudo-bridging financing for the Aneth acquisition, hence we expect refinancing to be a top priority this year," RBC said.

"We estimate that current cash interest costs are running at around US$27 million per year (including cash coupon on preferred equity) and a refinancing of Elk's senior debt, project finance debt and preferred equity to high single-digit levels could save the company over $10 million per annum."

Its long life and low decline oil and gas assets are fundamental to the rating, but RBC expects the first quarter production report to demonstrate operating cash flow from the producing assets, expected debt refinancing to better interest rates and development plans to execute some of the growth projects at Aneth to increase production.

Last year's Aneth deal added 300% in oil reserves for Elk with 59 million barrels of 2P reserves and 6500 barrels per day production for 2018.

That meant Elk would have the second-largest 2P reserves after gas-focused Senex Energy and the second-largest oil production after Beach Energy. ​