You make some good points and it's strange that the BYE price hasn't recovered. I'll try to put together a quick summary of why the shares should soon get back to over $1 - or up at least 60% on the current price in only one or two months:
1. The Gulf of Mexico is becoming fashionable again...seems as though there is more oil than first thought, or else it's self-replenishing previously pumped out reservoirs. The area of most interest is the oil bearing central area. Salt dome prospects now are being studied as one of two most significant opportunities for profitable exploration (the other is horizontal wells). BYE recognized these trends and has concentrated its interests in shallow water, central GOM, salt dome prospects.
2. The BYE principals are experts in GOM prospects, having established Petsec a decade ago that was sold very profitably, and having some of the best technicians in understanding sophisticated seismic and its application to identifying salt dome oil prospects.
3. The principals have plenty of their own cash in the business, lent $2 mill when the drilling got stuck and are major subscribers for more shares at 65c. If they are so confident it gives us confidence.
4. The price crashed after three attempts to drill to target depth for the G sands, the main target. Seems to me that the drilling company was extraordinarily incompetent. Had the drill operated for only another one or two days we would have seen whether the oil reserves in G were as predicted.
5. Directors have advised that the well is already commercial because of the better than forecast reserves in shallower F30 and F40 sands. The discovery of commercial volumes tends to validate the theories BYE has developed from ARTM seismic and other sources of the trapping of oil under the dome and updip from previous drilling. As Hardoak has indicated, there may be 10 million barrels in the South West SMI 6 prospect alone (net to BYE at 81% of gross volumes with the government taking 19%.) With F being commercial, the incremental return from any additional oil in G and I sands will be very high - of the order of $80 per net bbl pretax at $100 per bbl price.
6. In the company's prospectus and 2013 Annual Report, management states that there are other prospects in the SMI 6 block. The company holds leases in the very prospective Eugene Is, other blocks and in May this year was granted exploration rights for three Grande Is blocks.
7. The recent takeover of EPI by Energy 21 (EXXI) was priced at $29 per boe of proven and probable reserves ("2P") Takeover metrics have been rising strongly over the last few years for GOM deals.
8. As a local comparison, Senex (SXY) in the Cooper Basin, has an enterprise value of $690 million at the current price of $0.67 and deducting for $76 mill cash, no debt. SXY is a profitable producer, with 2P reserves of 13 mmbbls worth $51 per bbl and 3P reserves of 20 mmbbls with an EV of $34 per bbl.
9. BYE's EV and market cap is $89 mill at $0.63 per share and including unlisted shares. I haven't allowed for options as they are exercisable at 50c, not much under the current price.
10. We now have to make some guesses as to BYE's reserves. We should know shortly - perhaps within a week with the Annual Report, as the seismic conducted on Eugene Is in Q1 has been analysed and Netherland Sewell's reserve certification should now be ready. The update is likely to include 1P and 2P reserves for the last well.
11. If we assume that the last well has net to BYE 2P reserves of 10 mmbbls and Eugene Is has the same, then the EV for BYE is around $4.50 per bbl. Allowing lesser reserves totaling 15 mmbbls, we get almost $6 per bbl EV. As noted above, recent takeovers are priced at nearly $30 per bbl (2P) and SXY's 2P EV is around $50 per bbl. These values also make allowance for the fact that the companies are profitable and have already invested large amounts in production and infrastructure.
12. So what price is reasonable for BYE? IF declared net 2P reserves are 15-20 mmbbls (plus gas) then BYE shares should be trading at the equivalent of $15 per bbl, or $1.50 - $2 per share. (15-20 mmbbls at $15 = $225 to $300 mill EV / 145 mill shares issued including 19 mill not-quoted shares.)
13. The company needs more cash to prove up reserves with drilling in SMI 6 and Eugene Is. Most likely funding will be by a JV and it will be very interesting to see the price paid for a share of prospects. Although the JV will dilute BYE's shareholders, it will speed up certification and development and bring closer a sale of the company at a good price to one of the acquisitive GOM producers.
Given the above, I'm confident the BYE price will rise above $1 quite shortly and will keep going up as new reserves are proven - perhaps with another well in early 2015.
BYE Price at posting:
63.0¢ Sentiment: Buy Disclosure: Held
