It was at the end of Aug-13 that AUT made an announcement about...

It was at the end of Aug-13 that AUT made an announcement about free cashflow. They said that free cash flow would be generated by the non operated assets by end 2013 and at end 2014 for the Operated assets. Lately they now say that free cashflow is expected in 2H 2014 from the non-operated assets and presumably not any time soon from the Operated Assets, which they appear to have put on the back burner for now. Quite a change in guidance. Despite the recent 70% reserves upgrade, the sp looks to be weighed down by uncertainty on when AUT will make free cashflow.

The recent Reserves report appears to now be fully valuing AUT’s acreage with the recent down-spacing results, Austin Chalk & Pearsall Shale & inclusion of Operated acreage. 1P NPV10 before tax is some $1.8Billion, which is presumably ~ $1.2Billion after tax. Hence AUT’s current Mkt Cap is not too far off the 1P NPV10 valuation in the reserves report. If the market valued the full 2P NPV10, then the sp may get to ~ $3.50.

So how do Ryder Scott come up with a positive economic valuation of reserves when AUT have never made any money on their existing production? AUT now produce ~ 25,000 boe/d and have produced ~ 13 million boe, yet have made an operating loss in every quarter since start up. Last quarter, the cash balance dropped by ~$60million.

The reserves report values the Reserves at ~ $22-23/boe NPV10 before tax, which is exactly the average “Net Earnings Before Tax” for 2013 reported in the Canadian quarterlies. So how does AUT report such a healthy Net Earnings, whilst losing money each quarter?

The fact that there is such a continuing major bust between “net earnings” and free cashflow should be very concerning as it shows that the depreciation calculation may not be appropriate. This may lead to a large ‘correction’ if it becomes clear that the wells do not last as long as originally thought, or require significantly more spending to maintain production levels.

Given they now have ~ $42million cash left, that means they may have to start borrowing again to support the capital expenditures in 2014.