At some point we may have reached bottom and get a nice rebound. You just need the guts to catch a falling knife.
The convertible notes do not have loan covenants and are not due until 2019. The $100 million credit revolver is another issue.
Also if the properties aren't worth what is shown on the books, they could be written down to a level that is below net worth of the company. A $300-500 million write-off is possible over the next year.
Keep in mind that the PV-10 uses the previous 12-month arithmetic average of oil & gas prices for valuation purposes. The price used for Q1 2015 will be drastically lower than what was used in that $535 million in Q4 2014. As a simple rule of thumb, you might assume that each 10% drop price would cause a 20% drop in PV-10. As we go through 2015, if prices stay at $50 for WTI, the year end price used for PV-10 might end up 50% less than in 2014. Incidentally, the takeaway discount for Bakken oil has been just awful over the last few months.
Also, the company has $167 million in unproved property, most of which was acquired last year at inflated prices. These unproved properties also are vulnerable to a write-down.
At 70 cents a share, EOX might be a speculative risk/reward play, but don’t assume the shares are without risk at this price. A prolonged slump in oil prices will make the EV worthless, trip loan covenants of the credit revolver and put the company in a spot where it needs more cash.
Truth, IMO ESTE is fairly valued right now. With all that cash, the next few quarters won't matter much regarding operating results. Other companies have leverage, which means cash problems, but not ESTE.
However, it is a fact that the company will take large property impairments, so don't be surprised when you see the Q1 and Q2 results.
As an upside catalyst, I would look for using that cash to get distressed assets at a bargain price. Or they just wait out the current oil depression and start developing their existing properties in two or three years, whenever oil rebounds to a reasonable level.
IMO, the primary problem is establishing the value of EOX properties. While the debt is known, the properties could have a wild range of values.
In 2014, the company invested $479 to acquire and improve its properties, the lionshare of that happening in the second half of last year just as values began to plummet. So the properties are worth less than the purchase price.
Fortunately, the convertible debt has not financial covenants, so it won’t be an issue until 2019. The revolver however has covenants, however the company has properties whose book value was $619 million at the end of 2014. That property becomes collateral for the revolver which we think is currently drawn to about $100 million. Even if loan covenants are violated, that property ought to have some collateral value.
Back to my first paragraph, on the issue of the value of those properties. The PV-10 will change each quarter. Write downs could end up $300-500 million this year if oil averages $50 for 12 months. However, a true market value for these properties might be quite different, and if oil prices eventually rebound in a few years, this property might have its market value return.
I’m a little confused about the need for issuing up to 100 million new shares. It does seem odd that White Deer would put in all that money if more cash was needed for short term debt revolver issues. And it also doesn’t seem likely that the property couldn’t support $100 for collateral purposes. Very odd.
My instinct tells me that the shares are not vulnerable to any short term bankruptcy, and it seems like the dilution and future property write-offs is already built into the current share price. You might wait it out a bit and see what happens, at least wait for the Q1 financial report and see if this issue is explained a bit better.
I've seen this done to many small caps. The SA article provided no good fundamental reason whatsoever to buy this stock. FPP will write-off all of its net worth within two quarters, then it will have debt covenant issues.
Just amazing all those dingbat comments that have shown up on the SA and Yahoo message board. Wow.
I'm expecting more than a $100 million write-off of properties. It is already built into the the share price, so anything less than a $100 million write-off could be bullish.
This will be just one of many E & P companies that take big impairments.
What if the current shares get diluted by 80-90% once USEG floats its $100 million of new capital?
As if there is a market for that kind of property today. The lenders are shrinking the amount they will lend due to the fact that these properties aren't worth very much today.
Jones, I have two business degrees and forty years of stock trading, not to mention that much actual business experience. So yes I know what I am talking about. The paper losses will be real if oil doesn't go back up and any lender will apply that standard.
My negativity regarding EOX comes from the consequences they get from the $480 million of additions in property made by the company last year, of which more than $300 million was supported by debt and accounts payable increases. It brought the total book value to properties at $620 million.
Those properties are no longer worth $480 million. The ceiling test will require write-offs using a 12 month trailing average for the price of oil. The Q1 write-off will be brutal, probably over $100 million. It looks like Q2 is also going to be more brutal. While we can't know for sure how long oil stays at $50, if it stays all of 2015, the write-off to Emerald could be as high $500 million.
While you refer to these entries as non-cash, it will cause a negative net worth situation. The availability of the revolver will be cut. It might lead to stock de-listing. It will create all sorts of problems.
The one positive is that the share price is already so low, that this news might already be baked into its value. Certainly, a surprise uptick in oil prices would help Emerald share price.
Jones, I don't know where you get the idea my yahoo id is only 2 months old. I've used it since around 1999, and it is primarily the only Yahoo id I use. I also use the same id on Investor Village.
The one thing we might agree on is the potential up value of EOX share price in the event oil prices rebound. I don't pretend to know where oil prices are headed, IMO the best strategy is to plan for a range of possibilities. I doubt anyone, including the talking heads, know where the price of oil will be in three months, one year, or three years, etc.
Actually, the company's operations showed some promise last year.
But what happened is a group of under 40 year old execs got paid seven figure salaries to manage a 42 employee operation. They completely changed the structure of their balance sheet, overpaying for new properties at the worst possible time, primarily using debt. As I stated before, the losses this year could end up as high as $500 million as their properties get written down to current market values.
While bankruptcy is possible, it appears the financial distress is just starting. There hasn't been any loan covenant violation announced yet. There hasn't been a missed debt payment. The convertible notes aren't due until 2019. Also, in the last four months, they've added extra capital at least twice, and now they've indicated there might be more capital added.
As a result, I do not expect a bankruptcy this year. Share dilution is much more likely. Also, a rebound of oil back to $65 or $70 would be a big relief. It isn't how low the price of oil goes, it is how long it stays low that matters most.
I only said what I said, no point in reading more into it.
The company already wrote off $19 million last quarter at a time where most E & P companies did not have write-offs.
That means with the new lower price levels applied to PV-10, ESTE is vulnerable to a bigger write-down this quarter. While your point about the cash is a good one, I think the impairment issue is also a subject worth discussing, because it will be significant.
For some reason, White Deer bought quite a few shares at $1.12 just a few weeks ago.
Reserves are valued based on a 12 month backward looking rolling average. I wouldn't be surprised to see a nine figure write-down for the next quarter. If we get to the point where the 12 month rolling average for WTI is $50, EOX could ultimately write off $300-$500 million depending how its unproved property is impacted.
But as that long term WTI figure stabilizes from $50, to $60, $70 or hjgher, there ought to be a leveraged impact on the EOX share price.
Revising PV-10 is a result of following SEC guidelines, not doing something for the lender. The ceiling test for property impairments occurs each quarter. In fact if you look at ENRJ's last two 10K reports, you will see that price hasn't even impacted the reserves yet.
Instead, it appears the company had to classify many of their proved reserves into non-proved reserves. SEC rules will not allow a reserve to be classified as proved if the company expects development to take more than five years. Thus many of the reserves could no longer be included in the PV-10 calculation.
Regarding price, if WTI oil stays at $50 for an entire year, I'd expect ENRJ's PV-10 to get written down another 75%, with a big chunk of that being announced in a few days when Q1 2015 comes out.
While the company’s 2014 year balance sheet looks good, the PV-10 is marginally above the company’s book value of properties. That means it will get hammered with write-offs, particularly in Q1 and Q2 2015.
All the $ 23 million in debt contains financial covenants, so I’d say if we have $50 oil through September, the loan is called, the writeoffs are such that there is no net worth, and the stock becomes worthless. There are other companies with bonds that give breathing room for three or four years, so it’s not just the debt ratio, but the terms of the debt.
If oil stabilizes at $70, it’s another story. Classic scenario for many other E & P’s , this is just one of many, not a diamond in the rough.
Thanks for posting it, we should watch it through Q1 and see what happens.