Lew,
Thanks for the details.
The deal negotiated by Laird (LD) apparently has some major advantages to AOW over the deal negotiated by Jarvis and announced on Aug.27 (JD).
If I understand it correctly, in the Jarvis deal (JD), by Sept. 30, 1999, AOW has to come up with 42.5% of the estimated cost of completing a well on Gemini and has to pay 42.5% of the cost of subsequent wells. These are huge expenditures for a little company with only about C$350 k in the kitty back on Jan. 1, 1999 (latest report I have, dated 3/31/99)and whose stock sells for a pittance.
Even if the first well were to be a prolific producer, as we have seen from UP's case, funding a continuing drilling program from the meager income derived from a well or two would be impossible. For a company whose stock sells for C$0.14, to raise funds for drilling through equity would involve horrendous dilution. Wouldn't existing stock become virtually worthless? In my opinion, massive debt would be a killer. So where does Jarvis figure on getting the money for a drilling program???
The JD's big advantage is that AOW retains 42.5% interest in the production of the Gemini wells.
The LD, on the other hand requires only that AOW put up an initial C$500 k. AOW receives a C$100 k acreage fee before each well drilled on Gemini is spudded. LD specifies that at least 11 wells will be drilled during the first 2 years. So AOW would have a guaranteed income of a little over C$1 M over those first 2 years. There is the theoretical potential of AOW ultimately receiving C$12 M in acreage fees alone, in addition to 10.63% of production.
Under LD AOW stock would not be diluted, nor a huge load of debt assumed.
The big disadvantage of LD is that AOW's long-term interest in the production from Gemini would be reduced from 42.5% to 10.63%.
The question then becomes:
Is it realistic to believe that AOW could fund 42.5% of a Gemini drilling program on a continuing basis without going bankrupt, diluting existing stock to almost no value, or incurring debt that would absorb almost all the income from production just to service it???
I have absolutely no way of calculating with any degree of credibility any answers to this question. Merely from anecdotal evidence (such as UP's experience), my impression is that such an assumption would be very unrealistic. But I don't have access to the info and the contacts that Jarvis does.
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Entirely apart from the above: Lew, is the only misdeed by UP management that they repudiated the previous deal with Laird to make a new deal with Jarvis? If so, then what we have here is a question of how legally binding was the deal made by Laird. Of course, if the LD is legally binding, then UP is guilty of breaking a contract, with all the negative repercussions on UP which that could have.
The evidence regarding this issue is not known by us, at least by me. I don't know what was recorded in writing and duly notarized. If board pre-approval of Laird's deal was merely verbal, then it becomes his word against theirs regarding whether approval existed or not. I feel in the dark regarding this issue. |
