Equal Hunton wells have an average economic life of 18 years, production usually starts with extensive water production, once the water peters out (could take up to few months) oil and gas production start following, oil first and then gas, the gas heat content (liquids) increases with time (rendering the gas stream more valuable with time). At the oil & gas production phase, production usually plateaus for 18 months before it start declining. New Source Energy which also produces from the Hunton has indicated that wells in the formation initially decline at 18% in the early decline phase and decline at 5% in the terminal phase.
To get a feel about how the Hunton wells perform without drilling, it is best to view production data for the year 2010 when drilling stopped due to the company legal issues with its ex-farm out partner. In 2010 Equal drilled only one well in the Hunton in November 2010 (and due to the nature of Hunton production, this well probably did not contribute any meaningful production due to the water flush out phase). I will be comparing NG and NGL production only (and not crude because they drilled two oil wells in another area in 2010 and the data is included within the US totals).
An average decline rate of 10% is very healthy and considered a very low decline rate by industry standards. Should Equal Energy decide to halt the Hunton drilling and focus on the Mississippian exclusively, it would need to drill approximately 9 Mississippian wells per year to keep production steady, based on a yearly average of 200 barrels of Mississippian production (with 100 barrels net to Equal), should they follow this path, their production will not only hold steady, but it will get more oily over time. If the company opts to only divest the Canadian assets, a trust model for the Hunton/Mississippian continue to make tremendous sense, it would cost Equal $15.75m only to drill those 9 Mississippian wells, leaving the Hunton cash flow to be distributed to shareholders. Historically the Hunton produced $50m in cash flow, however even if we were to adjust for lower NG/NGL prices and reduce that cash flow to $35m, Equal would still be in a position to distribute at least 50c a share or 16% yield at the current share price (8% at $6); as production gets more oily and once NG and NGL prices rebound into 2013/2014 there is a large scope for an increase in the dividend.
Post a Canadian divesture Equal would be a very attractive trust with low debt, very lightly tapped credit lines, hefty yield and extensive oil weighted inventory available for drilling ahead.
You're understating the declines in the Hunton via the math you're doing, overestimating the debt repayment from the sale of the Canadian production and overstating the cash flow from the Hunton at current NGL prices. Throw on some SG&A & there is nothing left post debt.
Trust payouts at this point are nuts given the debt load.
The Mississippian isn't going to be able to bail EQU out - at least not until late 2013 - if at all.