Verbatim form the Pattersons report on the issues of debt and...

Verbatim form the Pattersons report on the issues of debt and hedging

"Dissecting ELK’s debt At the end of March 2018 ELK had US$175m in debt, but has vowed to strengthen its balance sheet via “elimination of multiple layers of funding through comprehensive refinancing”.

Its debt facilities are project specific and include the following:  Madden. ELK has a US$14.4m convertible loan with a maturity date of 31 March 2020, convertible at $0.103/share. Interest on the loan is at an annual interest rate of 11%, payable semi-annually. 

Madden. ELK has a US$6m credit facility with the CrossFirst Bank. The facility has an annual interest rate of US Prime Rate plus 200 bps with a three-year straight line amortisation requirement. The current US Prime Rate is 4.75%.  Aneth.

ELK has a US$98m senior debt facility provided by Riverstone Capital Partners LLC. The facility has an interest rate of LIBOR plus 900 bps and a tenor of four years (from September 2017). The 12 month US$ LIBOR is currently 2.77% pa. 

Aneth. ELK issued US$55m of preferred equity which is backstopped by AB Energy Opportunity Fund (a subsidiary of Alliance Bernstein). The coupon is 15% comprising 12% cash and 3% payment in kind (PIK), payable from cash flows. It is redeemable by ELK for cash at any time with a redemption premium to deliver a 20% total return. 24 May 2018 Elk Petroleum

Grieve. ELK has a US$58m senior debt facility with Benefit Street Partners to develop the Grieve project. The interest rate is based on an undisclosed fixed spread over the LIBOR floating rate, and the principal is repayable monthly now that production has commenced. The Benefit Street Partners facility funds can only be used to fund field development expenditures committed by ELK, minor upgrades to the Grieve oil pipeline and other associated costs.

All told, we estimate the weighted average interest rate on the facilities of around 12% implying cash interest costs of around US$28m before repayment commences.

Restructuring the debt appears to be a sensible cost saving measure for ELK, with every 100 bps reducing the interest cost by around US$1.3m, excluding the impact of any restructuring costs. Mid-cap energy companies carrying debt are typically a red flag and require further scrutiny, especially when the level of debt is significant. At the end of December 2017, ELK had gearing (net debt/net debt plus equity) of 102% (negative shareholder equity at the time). Of course with debt comes hedging, and with hedging companies are damned if they do and damned if they don’t.

ELK’s hedging – like its debt – is significant, but it should give investors some comfort with the debt the Company is currently carrying. Figure 5: ELK Crude Oil Hedging 2018 2019 2020 2021 WTI Fixed-Price Swaps (Aneth) Volume Hedged (bbl/d) 4,362 4,291 4,161 4,107 Av. Swap Price (US$/bbl) 48.21 50.57 50.43 52.76 % of Aneth Production Hedged 80% 72% 55% 55% WTI Put Options (Grieve) Volume Hedged (bbl/d) 1,340 1,074 Put Price (US$/bbl) 45 45 % of Grieve Production Hedged 100% 74% Source: Elk Petroleum, Patersons Securities estimates In addition to the oil price hedging, ELK also has gas price hedging on 40% of its forecast PDP Madden gas production from August 2018 – July 2019 at an average price of US$2.82/mmbtu. At the time of writing, the Henry Hub gas price was US$2.80/mmbtu. Using the current spot WTI crude price of US$71.92/bbl, we forecast hedging losses of US$37m in CY2018, US$26m in CY 2019, US$11.5m in CY 2020 and US$8m in 2021. Valuation Our ELK valuation is based on a discounted cash flow analysis of the Company’s interest in the Grieve project, the Madden gas field and associated gas plant plus its interest in the Aneth oil field. We currently risk weight the Grieve project at 75%, but will review this upon successful start-up of the project


My comments

This is directly from the Pattersons report . It discusses hedging and debt together. I can see that Ebita for 2018 is +40M and 2019 +90m . With a debt that has a notion interest charge of 28m that can be probably improved to say 24m per annum . There appears to be significant room to pump up production to beat those Ebita numbers, leaving significant room for principle reduction. "

There is also the timing out of the hedges to consider in the 2 year time frame. As ELK raises production it can hedge and pretty high numbers of the price keeps improving , my experience is that hedge books can change and commodity prices are hard to predict. If didnt have the hedges and the price went to $35 ELK would be a dead moose not an elk.