Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
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As we all know the CUDA situation is fast becoming binary. We will either acquire it's Working Interest in its “Wyoming Units" or we won't. Again as we know CUDA’s WI percentages vary from zero on the new discovery well (until 4x it's costs have been recovered) to 33% on Cole Creek and 27% on the Shannon Unit.
Bids for CUDA’s WI were due last Friday and I'm in no doubt ours will have been submitted timely along with others if there were any.
The recognised protocol here in the UK for single stage tendering (which is in effect what we’re going through) is that bidders whose offers aren't of interest are informed of their position as soon as possible and the second bidder is told that whilst his offer isn't the lowest it may receive further due consideration.
The lowest bidder is also informed timely that it’s bid is favorable and is being considered. So if we are in this position and a similar protocol is followed there's a good chance AM will be told this coming week.
Whatever the outcome is guys I don't think AM could have played the CUDA situation any better He saw CUDA's demise was on the cards in Q2 last year and by Q3 last he'd appointed the best legal Counsel he could find and through CUDA's affiliate Southwestern he’d filed a lien in the Wyoming State Courts and a financial claim against CUDA in the US judicial system.
CUDA's bankruptcy falls under Canadian Law and therefore under the court's jurisdiction there. It was thought by some that the Canadian courts would support Tallinns & Bridgings positions and refuse to recognise COPL's claim in line with the countries bankruptcy laws.
However as AM foresaw we now know from the recent US court hearing in the US COPL's claim has been upheld and COPL’s claim has been priority over CUDA's two lenders Tallinn and Bridging. All as AM planned and thought it would.
It may go without saying that I have no idea whether our bid will be successful or not . What I am aware of however is that under the “Unit Operating Agreement” between Southwestern and CUDA is considered to be a credit agreement under Wyoming Law and given CUDA has been in default COPL has been exercising its right of "set off" under the UOA.
Effectively CUDA has not been receiving any income whatsoever from it’s Wyoming assets for many months now. Conversely at the same time it’s debt to Southwestern and COPL has been accruing at a pace.
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As most if not all of us I have no idea what the running total of Southwesterns claim is. My calculation has CUDA's billing arrears amounted to $3.5m by the end of last December. This is a figure I see often referred to. But it’s only one part of the principle in the claim. The other part being 27% of any Capex costs such as the surface makeovers and the like..
If that wasn’t enough the cost heads making up the principle of the claim won't be the extent of it either There’ll almost certainly be extraneous cost heads too. Costs such as loss & expense,delay & disruption, fees, bad debt interest and perhaps most of all damages as a consequence of CUDA's breach. It wouldn't surprise me if the running total of the claim was up to $10mas of last Friday's bid date.
It seems highly likely to me and logical that AM would have submitted a bid that was discounted by the amount of the claim together with an explanation as to how the offer had been arrived at.
As I said at the beginning of this AM couldn’t have played it much better. He will have put the Receiver and its consultants orchestrating the process in a very difficult position. Moreover he will have deterred any other suitors who would have seen the ongoing claim as off putting to say the least!
If you’re trying to work out what COPL’s cash position as at mid March this year when Our senior debt repayment starts as I’m sure some of you are, you need to factor in the CUDA situation. The “set off” effectively has been giving COPL 85% WI on the Shannon unit and 100% on both Cope Creek and the discovery well.
If our bid is unsuccessful the claim will continue to accrue until it’s either settled amicably or determined through a third party resolution process whether it be Adjudication, Arbitration or Litigation and that’s going to be a huge risk in both time and cost to the Receiver as both are unknowns and cannot be determined.
You may also want to consider the sale and lease-back of the pipework currently under COPL’s ownership. It’s not often recognised but is referred to in the Tennison appraisal as having a value of about $10m. AM is already seeing it as a much better ROI if it’s sold.
A quick cash calculation justifies the statement in RNS no. 8471 issued on 10th January “ We will use internal resources to cover the initial costs of development whilst full field development plans are evaluated”. Especially when you take into account the current and futures WTI oil price and hedging will almost certainly change along with the structure of our senior debt..
AMHO as always and good luck guys!
Guys I'm an advocate of looking at financial appraisals at key stages and not during a company's growth when a company is operating in a relatively steady state. Not whilst it's ramping up as COPL is at the moment
During the ramp up the metrics are at their most volatile and they're therefore more likely to be misleading than helpfulful.
So before the blockbuster news this week I was seeing the first milestone as being mid March.
At that point the current debt starts to be repaid and the first production plateau of 5000 bopd from the Barron Flats Shannon unit should be running in a steady state.
The second milestone I had was in Q2 when I BFS should be running in a steady state at the second plateau of 7000 bopd.
I've given my SP assessment and explained my reasoning at both junctures before and both were multiples of where the SP is now.with or without CUDA’s WI.
But as attractive as the appraisals looked, they are nothing compared to the potential we now have in the Federal Fields discovery. It is truly mind blowing and and again many multiples of the previous best cases.
We should wait to see what Ryde Scott's valuation is for the new Federal reserves. In theory it should be a straightforward addition to the numbers indicated before.
GLA. I’m in no doubt we're in a very enviable position here in my opinion.
Shaa FWIW I see COPL having two confidential streams running at the same time.
In no particular order if we look at the CUDA acquisition first. In my view the process was always going to take two to three months or so to conclude depending upon the circumstances. How many meaningful bids will be submitted and what caveats will need to be resolved for example.
But the conclusion of the process isn't the critical point in time as I see it . The bidding process will be going on quite separately to the court procedure in my view.
It will include inviting bids from any interested parties and the Receiver will need a week or so to reconcile them and select one to accept once they're submitted. That process may have started by now I think given the urgency mentioned in this week's placing.
Once a bidders offer has been selected for acceptance the two parties will go through a process of dotting the "i's" and crossing the "t's" followed by an exchange of meaningful Letters of Intent or Memorandums of Understanding setting out the Heads of Terms.
It's at the point of exchange of those documents and providing they're meaningful the parties enter into a binding agreement.
It follows that it's at that point confidentiality should be able to be lifted. I see we could find ourselves there around the middle of January or perhaps earlier if COPL are the only bidder or submit the only bid capable of being accepted.
After that the lawyers then will be tasked with drawing up formal contracts. They may take three to four weeks or so to do their bit which puts the formality of both parties signing the contracts to conclude matters around the end of February if I'm about right.
The outcome of the development well in the Dakota sands of the Federal Deep Unit is entirely different. Placement into a "tight hole" status was done for other strategic reasons too. We probably know what they are without me saying.
Although those other matters may be already in hand I'm not sure when we will hear about their outcome other than to say I doubt it will be before we hear about CUDA.
As well as Nigeria there should be other news on the Wyoming assets too I believe. So I'm not saying it'll be the middle of January before we hear anything.
This is just my opinion as always guys but let's hope it works out well for us.
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Thanks for all your great posts Tiburon. I hope my comments will be if interest to you and others.
FWIW I've trie to set aside any supposition arising out of the placing this morning and simply ask myself the question is the equity released more likely to be dilutive or is it on balance more likely to be accretive.
Overwhelmingly if it means we acquire CUDA's WI at the right price for me the answer is it has to be accretive.
I'll keep the maths rounded in the following but for example let's fast forward to Q3 next year and consider what two alternatives might look like.
One without CUDA's WI and one including it.
We need to strip out Nigeria and the Federal Deep Unit as CUDA wouldn't have had an interest in those. Also CUDA's WI in Cope Creek would have been 33% and not 27%.
Let's assume by then the Shannon Unit is running in a steady state and optimised at its second plateau of 7,000 bopd. Let's also assume the oil price being paid is $70/brrl by then.
The imported gas gas costs should be at their lowest giving us relatively high operation netback which I'ce assumed to be $45/brrl.
The principal if the loan will be being repaid along with the interest by then too. Of the $45m borrowed $9m is derivatives leaving the principal of $36m which is to be paid over the term of 36 months. The interest is subject to Libor but for now I think it's reasonable to assume it should not be more than $4m/ annum for the first year.
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Without CUDA's WI:-
We have 7,000 x 58% giving us 4060 bopd/ 1.48m bopy net for the Shannon Unit.
In addition say 900 X 66% giving us 600 bopd/ 0.22m bopy net for Cope Creek.
The two give us a total production of 1.70m bopy which at $45/brrl gives us $76.50m annual operating netback.
Taking the costs from the $76.5m we deduct the annual loan repayments of 17.00m and annual G&A etc which I have at no more than $10.00m. That gives us an important earnings figure of $59.50m which is the same as net profit given there will be no corporation tax to pay. Production tax and royalties have been allowed for in the netback calculation.
Then using an ratings metric to calculate the value with a p/e ratio of 15 we get a Market Cap of $892.50m and finally with about 190m shares in issue after today we get a Share Price of $4.70 which is 348p using today's exchange rate.
With CUDA's WI:-
We have 7,000 x 85% giving us 5950 bopd/2.17 m bopy net for the Shannon Unit.
In addition, say 900 bopd/ 0.33m bopy for 100% Working Interest in Cope Creek.
The two give us a total production of 2.50 m bopy which at $45/brrl gives us $112.50m annual operating netback.
Taking the costs from the $112.50 m we deduct the annual loan repayments of 17.00m and annual G&A etc which I have at no more than $10.00m. That gives us an important earnings figure of $85.50 m which is the same as net profit given there will be no corporation tax to pay. Production tax and royalties have been allowed for in the netback calculation.
Then using an ratings metric to calculate the value with a p/e ratio of 15 we get a Market Cap of $1.28bn and finally with about 190m shares in issue after today we get a Share Price of $6 75 which is 500p using today's exchange rate.
The appraisals are a demonstration of how significant the acquisition of CUDA's WI is to us guys.
I've given you some metrics that you may not agree with and you may want to change. There's nothing in there for BFFD yet and obviously not for Nigeria.
AINHO and let's hope it comes good for us guys.
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The cost & value situation on the Wyoming assets isn't particularly easy to understand guys. I think most of us will have different views. But FWIW here’s mine.
I find it helps to break down the timelines we’re going to be looking at into key stages or milestones.
The first one I've chosen is between now and mid March next year. Mid March 2022 is when we start to pay back the principle of the loan as well as the interest we are paying now.
I've also subdivided the overall period of the 110 days or so into two. The split being this year and next.
The reason for sub division is the oil price hedging. We have a monthly swap agreement with the lender. For this year the hedging is 21,802 brrls/ month at $61.28. For next year it's 32,015 brrls/ month at $56.58.
From the last RNS a few days ago we know that production jumped by 35% to around 2,700 bopd gross when the make over of the best producing well on the Shannon unit had been commissioned. It was the first well of the 5 horizontal wells to be upgraded I believe. The other 30 or so wells in the unit are vertical.
We also know that it's likely fewer wells will need to be upgraded to achieve the designed production rate and that the miscible flooding scheme is working much better than envisaged. Exceptionally well we’re told.
It seems not unreasonable to assume the surface makeover has been planned to strategically upgrade the wells in commercial sequence. Hence the work on the best producing well being done first.
That being the case I don’t think 5.000 bopd gross by the end of the year is unachieveable from the Shannon unit now that the gas supply has been secured and the surface makeovers are in hand. I think it’s quite likely the other horizontal wells will be giving us step changes too albeit perhaps smaller ones.
Further I don't think 7,000 bopd from Shannon is out of the question by next March, which is an average of 6,000 bopd for the 70 day period.
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The cost & value situation on the Wyoming assets isn't particularly easy to understand guys. I think most of us will have different views. But FWIW here’s mine.
I find it helps to break down the timelines we’re going to be looking at into key stages or milestones.
The first one I've chosen is between now and mid March next year. Mid March 2022 is when we start to pay back the principle of the loan as well as the interest we are paying now.
I've also subdivided the overall period of the 110 days or so into two. The split being this year and next.
The reason for sub division is the oil price hedging. We have a monthly swap agreement with the lender. For this year the hedging is 21,802 brrls/ month at $61.28. For next year it's 32,015 brrls/ month at $56.58.
From the last RNS a few days ago we know that production jumped by 35% to around 2,700 bopd gross when the make over of the best producing well on the Shannon unit had been commissioned. It was the first well of the 5 horizontal wells to be upgraded I believe. The other 30 or so wells in the unit are vertical.
We also know that it's likely fewer wells will need to be upgraded to achieve the designed production rate and that the miscible flooding scheme is working much better than envisaged. Exceptionally well we’re told.
It seems not unreasonable to assume the surface makeover has been planned to strategically upgrade the wells in commercial sequence. Hence the work on the best producing well being done first.
That being the case I don’t think 5.000 bopd gross by the end of the year is unachieveable from the Shannon unit now that the gas supply has been secured and the surface makeovers are in hand. I think it’s quite likely the other horizontal wells will be giving us step changes too albeit perhaps smaller ones.
Further I don't think 7,000 bopd from Shannon is out of the question by next March, which is an average of 6,000 bopd for the 70 day period.
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This year then:-
For the 40 day period I have the average production from the Shannon unit to be 3,850 bopd gross and 2,215 bopd net.
In addition I have Cole Creek producing at 600 bopd gross and 400 bopd net. Last but definitely not least let's assume Federal Deep gives us an average of 150 bopd.
If I'm right we have an average production rate of 2760 bopd or thereabouts and 110,600 brrls in total.
From there we have around $4.44m total netback less $40k/day for interest and G&A which is $1.60m giving us $2.84m positive cashflow.
From there on to mid March next year:-
For the 70 day period I have the average production from the Shannon unit to be 6,000 bopd gross and 3,450 bopd net.
In addition I have Cole Creek at 900 bopd gross and 600 bopd net and last but not least let's assume Federal Deep gives us again an average of 150 bopd.
If I'm right we have an average production rate 4,200 bopd or thereabouts and 294,000 brrls in total.
From there we have around $11.76m total netback less $40k/day for interest and G&A which is $2.80m giving us $8.96m positive cashflow.
In summary I think we could see close to a further $12.00m positive cash flow generated between now and mid March. All assuming the MF continues to perform exceptionally well as it has been and the prices paid for COPL's oil stays above or around $70/brrl. I very much doubt the $12.00m or whatever it turns out to be will appear as cash on the balance sheet. I think AM will add it to the $11.00m he already has and include it to pay for further development.
As an aside, by the time we get to March I hope we've acquired CUDA's WI and the Federal Deep unit turns out to be transformational as I’m hoping it will be.
We should know well before the end of the period if we've managed to acquire CUDA's WI. if we have and it at a cost less than $20.00m the cash flows improve proportionately. On Federal Deep we should know more as early as next week.
AIMHO as always and fingers crossed.
Thanks for your posts too Tiburn.
They're always excellent and very informative.
You and I are on the same wavelength in wondering what AM's short term development plans might be.
I I heard him say in a recent podcast there were several development models under consideration. But a few things needed to fall into place before a final decision could be made.
I imagine all of them will be value/cost driven although the further exploration drilling required by statute following the BFFD exploration well will have to feature and be programmed in too.
I imagine his decision will depend largely on the CUDA outcome too. I'm hoping there's little or no other interest in the Wyoming assets and the Receiver is given Hobsons choice.
The other factor will be the netback from the MF on the Shannon unit. I'm with you and am hopeful the first plateau of 5k bopd gross can be reached this year and 7k bopd can be achieved by mid March 2022.
That being the case the math tells me in theory there should be approximately 5m positive cash flow generated to help with the development costs.
However I imagine the development programme will have started before then such that we are unlikely to see it as cash on the balance sheet.
As you rightly say $2.5m needs to be maintained under the terms of COPL's finance agreement and AM will need to be mindful of the cash needed to cover the further drilling required by law. So perhaps a compliance budget might be near to $10m for next year.
All that said and the cash needed to cover costs on the Shannon and CC units I'm hopeful we'll hear the programme to develop the Dakota sands and BFFD generally will be taking centre stage.
There are strong signs including declaring a tight hole status that's telling me the BFFD assets could be transformational for us. I'm really hoping that it turns out to be the case.
Hopefully we know more within a few weeks.
GLA and fingers crossed.
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After saying I wouldn't I've posted here two draft appraisals I've put together on COPL’s Wyoming assets and where I see the company in March next year. I haven't included Nigeria and I’ve chosen March given that’s when COPL starts to pay the principal as well as the interest under its loan agreement.
The first appraisal is based on no increase in COPl’s WI's. Oddly they're all different. BFS is 58% and BFFD is 100% of the exploration well but only until 4x it's cost is recovered. CC on the other hand is 66% and was the only unit shared between COPl & CUDA.
The second appraisal is based on COPL acquiring CUDA’s WI. In the appraisal and for the acquisition I’ve assumed COPL will need to borrow an additional $20m on similar terms to the current facility.
I’m hoping the cost to acquire the additional WI will be less than the $20m I’ve allowed. At the end of the day I imagine it will come down to whatever a party is prepared to pay for it. Anyway from an analysis viewpoint FWIW here’s my thoughts.
COPL paid around $54m for Atomic. But to get to the WI content of that cost fees have to be deducted. The value of the Affiliate companies - Southwestern and Pipeco also have to be deducted. Further the value of the infrastructure and equipment Atomic owned have to come out.
Strip those values out of the original purchase price and I’m guessing what’s left is around $25m - $30m for the WI. So on that basis CUDA's 27% share could be argued to be worth between $12.5m & $15m.
As if that wasn’t enough AM could now argue the value of Southwesterns claim for breach of contract along with associated costs should be deducted too. And lastly but not least the market isn’t valuing the Atomic acquisition anywhere near what COPL paid for it. Well not yet at least.
Going forward Wyoming should be becoming more profitable both in terms of numbers as production grows but also in unit terms per barrel. On all units but particularly Shannon we will witness the cost of importing gas falling on a sliding scale. We heard AM say that for Shannon the MF costs in Q3 next year will be virtually the same as an unforced extraction cost.
On Federal Deep all the plays are below 1m deep which means the Federal rate of royalty payments will apply and not the ones paid to the landowners. So 12.5% vs 20% on BFS and even higher on CC. So quite a significant saving.