Where is all of the production growth that you have been predicting? It appears that CEP is barely managing even pedestrian oil production growth.
Debt isn't falling and they are now looking at jettisoning the Black Warrior Basin properties at what appears to be near the bottom for natural gas pricing in order to reduce debt.
The BWB isn't very attractive at current prices, but the asset does serve as a nice cash flow stream with a VERY attractive decline rate of under 5%. I'm somewhat ambivalent on the sale, if I believed management could indeed grow oil volumes, bu these guys have not been successful (at ALL) in reducing operating costs and the sale will likely result in higher opex on a per unit basis. Ugly.
There is no oil growth here and it will take another $1.00 up ,in natural gas to obtain marginal value so any sale of these assets will net very little as the buyer must bet on the next 2 years being very good ones for gas prices!
you do know that 2013 - 2014 for the black warrior are hedged at above $5 and that today you
can hedge 2015 - 2016 at about $4.5. right?
so the buyer gets a stable production hedged for 2 years and can be hedged for another 2 years
at a decent cash flow. when prices recover into 6+ the buyer can increase the capex and drill
some more wells.
anyway, only my opinion.
you raise several points:
1. sale - I do not know of too many better ways to raise money than to sell an asset who is very
predictable in its production decline and is hedged above market for two years. on top of that, they
are doing it at a time when the buyer could hedge 2015 - 2016 at 4.5 or even more (which adds to
future cash flow stability).
2. natural gas cycle - we are not at the bottom any more. they managed to keep their assets off the
market at the bottom (better than most growth companies who dilute their shareholders to death
over time - in my opinion).
3. oil production - if you remember, they had a 80-100% increase in oil in 2011 due to that small
kansas purchase they made at the time. I think that production makes it looks worse as it goes
away. this year they will do less than 40 wells, which is not much production. if they manage to,
next year, be able to put about $25M of capex into, lets say, 80% wells they could do close to
6 wells per month , which was the basis of my assumptions. that could keep their cash flow at
today's level without the black worrier, which is where they need to be.
4. management expenses - two things about that - as natural gas production is not maintained, per
unit expenses will go up. second - as oil do start to gradually be added, it will stabilize and they
do need to reduce their overhead, unless they can get some interest in financing horizontal
drilling in their properties. if they do not reduce overhead on their own, pstr will have (with white
deer) a good reason to go straight to the shareholders and make a case for a full merger (I do not
like that route as I do not want to be diluted by white deer and accrued 12% interest rates).
I hope they keep the company independent, but they will have to make the company more efficient
by a lot. I think they know that...
I am not under any illusions that some miracle will happen here. this will be a long climb out of a
tough spot. I hope they give a real update about decline curbs of oil real soon to let us know that
the assumptions they presented earlier in the year are still valid.
anyway, good luck to us.