latest patterson research, page-15

Just because somebody else throws a bunch of money into a company doesn't mean that it is a good investment!!

Here are the bad and good points about Elk:

1. A huge amount of debt

2. The debt carries huge interest rates and some of them are not calculable because they are based on production. That Preferred debt is going to cost the company a huge amount of money. What will the ultimate interest over time be 20%, 25%, 40% per year?

3, The hedges are giving away all the upside until they expire and still don't protect on the downside as Elk is a price taker for its production. (See post where it indicates they get 'taken' by the refinery for Aneth production.)

4. They have huge contingency payments based on the price of WTI for which they basically have no upside at present. I can see the possibility of Elk paying out for the upside and then seeing WTI crash after the payments

5. Grieve is still an unknown with production data still to come. The Preferred Stock takes 5% off the top of any income before ELK gets its hands on it.

6. Any debt refinance is not guaranteed.

7. The recent cap raising clearly indicated that Elk is not generating enough cash to fund its required payments and expansion at present.

8. Huge dilution to existing shareholders continues. Again it is a negative for shareholders to see a 15% dilution, but only a 5 or 10% increase in oil per share backing. Will there be more dilution? Based on previous company actions, the answer is probably yes.

There are also some 183 million shares sitting in the convertible notes if the price ever hits 10.3 cents as well.

9. The Preferred Series B takes all of the income from Madden until repaid and then 25% thereafter.

Good points:

1. Aneth was bought cheap.

2. The oil price is much higher now than when Elk bought Aneth.

3. Grieve could turn out to be a good producer.

4. The hedges do expire in several years and if the price of oil is still high then Elk will do well.