Can ERM please get rid of EGO, page-3

There is sufficient baseload power generation capacity in Australia to last for years. As such Australian generation will not be an expansion area for ERM. On the retailing side there is a ceiling for growth that exists due to stagnant or declining demand in the sector as a whole. ERM can grow by taking customers off competitors but this has obvious limitations. As such they either need to expand overseas (which they are contemplating) or diversify their income streams.

The investments in the Clarence Moreton basin of NSW have been severely impacted by short sighted state government decisions - resulting in an indefinitely increased time frame to monetisation for those assets. Realistically I think we are probably looking around 2018 there.

In WA EGO have well defined ground close to infrastructure and markets with offtake agreements in place for both gas and condensate. Their issue in the past has been management that severely diluted the company with minimal growth and consequently they have got themselves into a debt laden situation. The assets themselves are good quality, it is just a case that the company does not have the financial muscle to force its way out of the current situation, let alone drill and expand production. When tranche 2 of the Alcoa GSA starts I understand they will be cash flow positive (don't quote me on that).

Ultimately EGO is over the barrel whichever way they turn. if the deal is voted down they have no way to pay off their debts without significant dilution. This will still leave them no cash for expansion, which is required to get them cash flow positive. Ultimately they will have to keep going to market for cash unless they found a farm-in partner. This ultimately puts them in a situation where Alcoa and ERM, as creditors, could take the whole company for not much at all. Hypothetically this potentially gives Alcoa the processing facility and ERM the tenements to what would be a cash flow positive enterprise in the relatively short term given minimal extra capital expenditure.

If the deal is agreed to then there is little risk to ERM. They have a blocking stake in a re-capitalised company which should be cashflow positive within 12 months. The restructure also allows for a farm-in partner, which would see EGO have free cash for expansion; whilst also giving ERM 70% of any rise in the EGO share price as a bonus. ERm then have a 20% exposure to any upside via the EGO share price whilst not being required to outlay any cash to fund further exploration/development work, due to trading in their tenements for the extra interest in EGO.

In a nutshell if the deal is knocked back ERM will ultimately win by taking assets as a creditor or by taking the company over at a low value following future dilution, but will need to outlay capital for future operations. If the deal is approved ERM win by having a blocking stake in what should be a cash flow positive enterprise; with the bonus of a 70% top up payment for any positive event, such as a farm-in.

Ultimately I see it as a low risk entry into a growth market with significant upside that will help supplement the stable but growth restricted electricity generation and sales model that the company is based upon.

I hope that EGO holders accept the deal so that both companies can get the most out of these assets; rather than further years of stagnant operations with extreme dilution at the hands of EGO.

Clearly just my opinion, but in essence I see it as a good thing moving forward. Innovate or die.