Here's my reluctant challenge as I do not want to jinx the upward movement of the share price now:
1. Gas volume - 7,000 MMCF instead of 9,100 you have. They have reaffirmed this number twice and I'm going to take it
2. Wyoming price should be Henry hub - 0.73 (transportation). You already accounted for transportation revenue in Wyoming. My average realized price is 2.43 (Marcellus price, P&G contract, and Henry Hub considerations)
3. Lease and DDA are the ones I'm not sure of. I have them about the same as yours. For DDA, I have seen the number from analyst from 17M to 23M. Not sure how they come up the number
4. Interest expense 7.7M
As mentioned, with hedging, WRES will be okay. The EPS is going to be slight negative or positive based on lease and DDA. The number I'm really interested in is 1Q'15. Need to see how much they draw on the revolver as this will quickly allow us to access how much they are burning cash (based on gas price and oil prices and their expected capex, they will have to use their revolver)
they have to dig 25 wells to keep the lease. That's why not hedging is such a big mess
That's the contract with P&G. They will sell up to 45,000 MMbtu and last quarter, they sold I believe 37,000. The price is ridiculous for WRES. Nymex +0.03. However, you need to take out the transportation cost of about 0.62 per MMcf.
This is another area they are not going to get this price anymore. I believe it was contracted a few years ago when Marcelluss price is higher than Nymex price. It will be interesting what they get. Perhaps more volume and lower price
I knew it already. They were mentioned as asterisk as it has been taken into account under GAAP as part of the purchase. So, the pro forma is more FY14. However, their guidance pointed to about 7,000MMcf for Q4. That's what I use. What's change from Q3 to Q4 is the costs. You will find that the leasing and operations, the interests and the DDA all will go up. I hope your model is right. I just don't see it in my money at the prices I assumed
They already using their revolver for additional $10M. They have about $95M left instead of the reported $105M. You can do the math. I'm not sure how they can fund it or they are expecting improvement in prices.
They don't have a problem with takeaway. They already contracted this for 4 years (I believe). The problem with Marcellus price with such a high differentials is that there are limited takeaways (and hence the transportation cost is high) and that they are ample supply to the local areas (decrease demand and price). Both of this are baked into the reported realized price.
As the takeaway capacity is build to link to a wider network, places where the gas is in demand will get gas. This may reduce the overall Nymex or Henry Hub price but will increase Marcellus price.
The hedges were put in place before Marcellus acquisition. The volume from Marcellus is much more significant than the hedges. Having said that, hedges for Marcellus price is really not effective. They will need to find other hedging instruments.
Here the good news and bad news from the guidance:
- Oil breakeven is lower than we thought @45
- Reduction in capex for oil
- Marcellus drilling in not self-funding (see below on simple math)
- I would have like to hear that they have ample liquidity and that they do not expect to breach the bank convenant at current price.
Honestly, I was hoping the production would be higher given they have completed 3 wells. Anyway with 8,000MMcf at the high side, they will get about $20M in revenue. Costs include $5M in lease and operations, $7M in interests and now they capex of $11M per quarter for Marcellus. I think they will have to dip into the revolver.
Again, look at the September presentation and refer to the well curve for Wyoming and Marcellus. While Marcellus is producing great, the well drop off rate is pretty steep too. FOr Wyoming, it is different as it is different type of well. The drop off is not that great. I would not use the previous quarter production number. I would use their guidance. Also, we have completed 3 additional well but they will only start producing in the first quarter next year
If I'm not wrong, the cash prices published by WSJ daily already included the takeaway (transportation costs). So, for today, Marcellus is 2.23. You just need to multiply that with the Mmcf to get your revenue. This price is approximate (very close) for the WRES Marcellus price as they have fixed contracted price of ~0.63 per MMcf for certain volume. This is a good thing as many producers are paying a higher price or worse left stranded if they do not have takeaway capacity.
For Wyoming, WRES realized price follows the Henry Hub pretty closely (slightly lower) as they don't have to pay for transportation. We owned the pipeline when we bought it from Anadarko. However, in the earnings report, you will see that the realized price is Henry Hub- 0.73 perMMcf but the transportation is reported as transportation revenue. In Fact, other producers are paying us to use the pipeline
That's in the ball park. Now, I just poured over the Marcellus acquisition filings to get first hand information rather than the BS the management trying to sell. If per quarter, Marcellus provide $17M revenue, it has about $4.5M leasing, operations expenses and $0.5M transportation expenses (from filing), and interest expense of $7M, this gives $5M net exclude DDA. DDA is $8M (from filing)...Hmmm, why acquire? Can someone verify this?
BTW - good to go green today. It has been awhile we ended with green. Hopefully, this continues tomorrow
I took the guidance at the basis since this the closest to the real number we got. Henry Hub and Marcellus prices - go to cash prices from WSJ and compile for each day. Sunset to go Chevron site. Transportation cost for Wyoming = 0.73 (they go this back as transportation revenue). Transportation costs for Marcellus is around 0.63 from UGI. This is contracted. Go to their SEC filling for the acquisition.
Gas is not a problem. Oil price is problem now. Hopefully, we are bottoming but will need it to go up a bit to breakeven. Gas can do the heavy lifting and carry the wait as well as provide the growth.
IN the 3Q earning release, they provided the guidance of 14,000-15,000Mmfc for the full year 2014. I took the higher number and backed out what they have produced to come up with 7,000.
Answer to your questions:
1. Not sure why he did not put the hedge in place earlier. He is either waiting for the right time to hedge as oil has been sliding down since July or he is looking for the acquisition to complete first, then access the capex for drilling before hedging. It was pretty clear they have intended to hedge but I think he missed the boat (not good management or focused to much on Marcellus acquisition)
2. I think he thought the interest coverage ratio only applies to interest from the lender and not the bond. However, I do think that Bank of Montreal told them lately that the interest would "not limited to the lender only". That's why they amended it on 12/2. I'm not sure why they would agree to amend it or they have no option
3. I believe they only hedge 1/3 of oil this quarter or 1100bbl/d. Right now, I'm projecting them to come in at -0.03 EPS this quarter. Production increases but the DDA and interest also increases substantially as the 3rd quarter only account for about 1.5 months (as the deal was closed in August 10th. Next quarter will be ugly BUT that's why being priced in the stock price now. If it oil goes back to 80 WTI or 70ish CMS, they will not risk any bank convenant
4. I would not focus on EPS now as this is not what driving the price. the derivation of EPS has heavy DDA component and they can adjust that in their drilling schedule next year. At current price, they will adjust to minimum drilling to satisfy the leases in Wilmington so as not to lose the lease. Needless to say, this will be at a lost at current price
It is about breakeven. At current California Midway Sunset price, they are losing money. Worse, they do not hedge at all for 2015. So, if the price of oil wants to drop, it better drop fast now and go back up in 2015. If it stays at current price point, it is like a slow death.
Marcellus acquisition was actually a good buy. However, Epstein did not realize that interest from their bond are counted toward their revolver loan's interest ratio - one of the two convenants they need to satisfy quarterly. That put them in jeopardy of breaching the loan convenant if current gas and oil price remains.
The only way they can belly up is the bank recalled their loan revolver. Marcellus is self-financing and and provided some cash flow too. However, not enough to provide 2.5X of interest expense. Interest expense each quarter is about $8M going forward. Thus, they need to make EBITDAX of 20M each quarter. While oil is only 24% in BOE terms, it is still substantial in revenue.
You are right but I put a slightly lower number e.g. 8,000 instead of 8,910. 81.1Mmcf/day for this quarter for Marcellus and 17.9 Mmcf/day for Wyoming.
I would have gone all in if we had hedged half of our oil production for 2015 and CEO did not resign. Those two things are giving me a pause to buy more as tripping a debt convenant at this time will be pretty bad. The good news is that it held pretty well today. The bad news is that it has not had a positive day at all since OPEC announcement. Damm OPEC. Would have had a great holidays is they announced a cut.