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Elk Valuation, page-5

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1,723 Posts.

17/06/14

22:55

Post #: 13537268
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Originally posted by robynjackson ↑

Looking at some of the posts here about the value of ELK reminds me of those looking for the pot of gold at the end of famous ELK rainbow, but to find out that it is really a leaden chamber pot filled with you know what.

Sorry, but I really do have to laugh at the values being given to ELK especially the Grieve asset. With regard to that NPV of $90 million:

1. The discount rate used IIRC was 10%. Sorry, but for an asset like this with the seller not in control of anything the rate will have to be much higher - I'd make a guess at least double that.

2. The fact that the operator has gone from a 100% CO2 injection for EOR to a waterflood based one has altered the timing, peak production, production rates, and the amount of oil that is going to be recovered. These all be negative compared to the CO2 recovery as initially called for.

3. As the seller of the asset is not in control of the project there is no certainty as to the amount and production of oil. The operator can turn off the spigot anytime it wants -oops there goes the cash flow.

4. Any offer is going to have to be made in cash and debt will not be acceptable. I wonder if ELK went to any banks and tried to get funding for the project? If so, IMO they probably were turned down for the above reasons.

Therefore IMO the so called $95 million valuation is nothing more than pie in the sky. My estimate of the price that ELK could reasonably get for the asset is a maximum of $30 million. From that they will have have to pay DNR the money borrowed for development to the date of sale, the bank loans, and any additional operating costs of the company until (IF ??) a sale takes place. Make your own guesses as to how much will be left for shareholdes, if anything.

As for other valuation considerations:

1. All buyers know that ELK needs the funds and is a desperate seller. The bids will all be lowballed.

2. Shareholders don't know what, if any, clauses there are in the JV with DNR as far as change of control and sale of the asset. Does DNR get right of first refusal? Can they make a higher offer once ELK has an offer on the table from another buyer? If so, why would another buyer even bother going through the costs and efforts involved?

3. The pipeline without DNR using it to transport oil is worthless. I wonder what the required minimun flows are to operate the pipeline? For sure in the initial stages of production there will probably not be enough oil being produced to operate the line and hence DNR's decision.

4. Ash Creek - you have to be kidding. I doubt that ELK could even give away the asset. IMO they would have to pay someone to take it off their hands.

5. Niobrara shale - no value at all. Farm out prospects were on going from 2011 and nothing happened.

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Robyn

For the various reasons that you have mentioned, and others, I thought that Ash creek would be the most probable sale, at about $10 m, this is a guesstimate based on P1 of 1m bo and $10/bo (in ground P1). Not forgetting the investment ($5m) so far. No encumbrances is also important.

Which, if it happens, would probably be enough for an Elk survival. Of course I am reliant on the accuracy of Elk anns. only, for this view.

So I would be interested in why you think it is unsellable.

Anyone else have a view, I would be very interested?

ELK Price at posting: 10.0¢ Sentiment: None Disclosure: Held
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