In order to be in position to avoid non-consent penalties and to make opportunistic investments in new assets, we will continue to evaluate various options to obtain additional capital, including borrowings under our Credit Facility, sales of one or more producing or non-producing oil and gas assets and/or the issuance of equity.......from page 15 of the 10-K
Impairments are a huge problem, because they cause violations of debt covenants. The resolution will be making WLL pay back a large part of that debt.
It doesn't stop the property impairments, but probably gives them positive net worth after the write-offs complete.
There are lots of other companies with similar or worse problems.
Not sure if you read the 10-K report, but the company put numbers to the risk of $50 oil throughout 2015. The potential write-off is $51 million. Add to that the Yahoo analysts estimates of losing 52 cents per share, or about $15 million, it wipes out 62% of existing equity.
I supposed some of the more levered E&P companies could see all of their equity wiped if $50 oil remains throughout 2015, making USEG a safer bet at $1.22/share than some of the others.
What might be interesting assuming the $51 million impairment, is much lower depletion costs going forward in 2016. Probably only $10/barrel.
EOX is so levered that it is an oil play. Either analyst could be right, depending on whether WTI stays in the $40's all year vs a rebound to $65.
You neglected to say how PV-10 declined 19% year over year.
Despite this, you are probably correct about all that oil being there. But it's development is contingent on acceptable pricing for oil.
That makes USEG an oil play like many others who are more levered....If oil rebounds, USEG gets its price back, but if oil stays down, USEG will have massive property impairments, in addition to an annual operating loss of $15-20 million.
At least they claim to have staying power.
One more comment from some one you called a retail investor.
It appears EOX tripled its property investment last year, with most of those purchases taking place in the second half of the year. The price paid for those properties exceeded that allowed for under the 2014 year end ceiling test. Basically they overpaid.
I didn't say I dislike wives of doctors, nor do I claim to like EOX. It is just a beaten down stock with some risk, but some time to allow oil prices to rebound.
My point of posting was to correct your misstatements.
What Hedge Fund Analyst would conclude that the 3 month rule makes sense for accounting purposes?
Oil assets often last 20 years, and to place a net present value on those assets based on only 3 months lookback is absurd and not realistic. Just because oil is low or high today doesn’t mean it will stay that way for 20 years. The current 12 month rule is too short, let alone a 3 month rule.
For the fun of it, I googled the 3 month look back SEC rule change you said is being considered. I can’t find a thing.
$51? That kind of misunderstanding is something one might expect from a woman or doctor, but not from a veteran trading E & P companies.
Check out page F-8 from the last 10-K where it explains the SEC method for the price used in valuing reserves….. The present value of estimated future net revenues is computed by applying prices based on a 12-month unweighted average of the oil and natural gas prices in effect on the first day of each month……
The above method applies to all companies, not just EOX. The Q1 rate will be $83 less adjustments for regional pricing. No company will be using the $51 rate in Q1.
The price for reserve valuation will be $83 for March 31, 2015. It was $95 for the year ending 2014.
The price used comes from a 12 month rolling average, so it will take a few more months of low oil pricing before the full effect of this price collapse is in place. IMO, it will be close whether writedown occurs in Q1, however, Q2 could be more problematic.
Also, EOX convertible notes have no financial covenants, thus that part of the debt will not be impacted until 2019.
The $300 market cap doesn't suggest bankruptcy. In fairness to the impairment issue, much of the AREX reserve assets are comprised of gas, which has experienced a lower price decline than oil.
Still the danger is how long oil and gas prices stay depressed. If it goes on for two or three years AREX equity is at risk.
PV-10 was $1.413 billion. Net book value of proved property is $1.221 billion. That's only a 16% cushion.
With the decline in oil prices, AREX will be vulnerable to a property writedown in Q1 2015. The danger of writedowns will become more severe in Q2 and Q3 unless oil prices rebound soon.
I'm waiting for the 10-K report to get an idea how much risk there is of property impairment.