"During the quarter ended June 30, 2013, the Company drew $1 million on the Credit Facility. As of June 30, 2013, the Company had an outstanding balance under the Credit Facility of $5 million. As of June 30, 2013, we were not in compliance with the current ratio covenant as defined by the Credit Facility. In July 2013, a semiannual redetermination of the borrowing base was completed by the lender, subject to the satisfaction of increased collateral requirements being provided to the lender. The Company is in the process of providing the required documentation. The redetermination will result in an increase in the borrowing base from $6 million to $12 million. The increase in the borrowing base will result in the covenant violation being mitigated. The lender has not presented a notice of default related to this covenant violation to the Company. As of June 30, 2013 we were in compliance with all other covenants contained in the Credit Facility.
This is currently a little old news, but it is one of the reasons, I have stated that lots of leverage and more debr don't necessarily mix well with a wildcat exploration strategy, and someone needs to keep a firm hand on Ray, because he definitely wants to go exploring. He hasn't yet shown me that he can find anything, though I am willing to be convinced. I think at this point he has seen a little wisdom in making sure that he has more cash flow under his belt and moving only slowly on a well here and there that is exploratory in nature and therefore with a higher risk of dry hole. We still don't know what happened on Schmale 34-20
but I think it must not be so good.....
The whole key to understanding the loan covenants is in the agreement which was filed with the SEC. It has a quarterly test based on multiples or ratios which ESTE has to meet each quarter for its current ratio, and its cash flow or EBITDA. Its apparent to me there should be no trouble whatsoever meeting this test the next few quarters, because cash flow and earnings will be very robust. This is a much bigger issue if we go back to 20 cent quarters. Not so much a worry at quarters in excess of 60 cents where I believe we are
going to be near term anyway. Still ESTE needs to think about its portfolio and how to make it more efficient
with respect to future cash flow, and this becomes more critical as the company incurs debt, and as
it gets more AFE's that it needs to participate in.
This is nothing more than a technical violation. They happen all the time to mid market companies. The banks want to lend, so they accommodate minor infractions.
I suspect since Earthstone is new to having debt, they didn’t think much about the current ratio. Then as all these wells went online, there might have been some reasons they didn’t want to sign off and actually pay the money until all conditions were met. Before long the company sees its accounts payable balloon and they trip the current ratio in their loan covenant. Yet the overall debt to equity ratio is fine and they have enough cash flow to justify loans of much more.
This is true - this is in regard to their arrangement with the Bank of Oklahoma in Denver. They only need to clean up this one aspect of the requirements. I suspect that added reserves/potential reserves and outlook will satisfy the bank and Ray/Earthstone have a very solid relationship with banks in the Denver area so it should not be an issue. The carrying period (spud to oil production) as Ray has noted before has been extended by six fold because of the new muti-well strategy - I would imagine all of this plays into it. Also - Ray has had others wanting to make an investment in Earthstone so that would be another route to cash IF needed - Ray has avoided that as to avoid dilution to we the shareholders. Yes - contrary to some of your fears - RAY IS ONE OF US AND LOOKING OUT FOR US. With the economy improving and 2014 looking in my BIG PICTURE to be solid Earthstone will be just fine in my most humble opinion but do continue your DD as it is what one must do. Boolean