Baseline Oil & Gas (BOGA) -- This is one of the few remaining low-float/penny stocks in the E&P space that has not moved very much yet. IMO, the biggest reason is an onerous capital structure, mostly caused by some very dilutive terms related to some convertible notes they issued last October in connection with their acquisition of their Blessing gas field. These notes, $50 M par, are initially convertible at $.72, but for the rest of the story, see below one of the "risk factors" in BOGA's SEC filings:
The Conversion Price of our 14% Senior Subordinated Convertible Secured Notes is subject to a reset based on the prevailing market price of our common stock during a specified period, and if such reset is triggered, the conversion price of our 14% Senior Subordinated Convertible Secured Notes will be reduced, potentially resulting in substantial dilution of the equity ownership of holders of our common stock.
If the volume weighted average price of our common stock for the 30 trading days up to and including December 31, 2008 is less than $0.63 then, effective as of January 1, 2009, the conversion price of our Convertible Notes will decrease to the higher of (A) $0.44 or (B) the volume weighted average price of our common stock for the 30 trading days up to and including December 31, 2008 plus 5%. In addition, if the conversion price is decreased to $0.44, the interest rate on our Convertible Notes will increase by 300 basis points. As of March 27, 2008, the last sale price of our common stock on the OTC Bulletin Board was $0.25. If such reset were to occur, upon conversion of our Convertible Notes, we would be required to issue substantially more shares of our common stock, thereby diluting holders of our common stock.
For the minority of you that are still reading, I believe that there is no reason why these onerous terms can't be overcome through the combination of high commodity prices and significant increases in production. Both of these situations are happening with Baseline at this time, although the big production increases have yet to find their way into their SEC filings. This will start to happen with the 2Q 10Q, which is due 8/15.
There also remains the possibility that the company would be nice enough to include 2Q company-wide production in some sort of operations update PR before that time. Their annual meeting is scheduled for 7/9, maybe they will put something out that morning.
As of 12/31/07 the company's pre-tax PV10 value of its reserves was $284 M, calculated using oil & gas prices of $96/bb. and $7.50/mcf, respectively. Obviously the value today is significantly higher, but let's play with the year-end figure. There is $115 M of senior debt, so that leaves $169 M to the equity-holders. The $50 M of convertible debt (including increases due to PIK interest payments) is convertible, at $.72/share, into about 75 M shares. There are also about $17.2 M options & warrants out, leaving a total of 127 M shares FD, or a value of $1.33 per FD share.
Granted, there is a risk that as a result of the reset provision on the convertible notes, there will be a lot more than 127 M shares out FD come Christmas. But I firmly believe that the stock will be trading over $.63 by the time the reset period occurs, so there will be no reset. This is due to the fact that, by that point, they will have put out 3Q numbers, and 3Q is lining up to be a tremendous quarter, given what they are doing in the field.
For more info on the company there is a great presentation on their website, see baselineoil.com . There, they boldly state their goal of ramping production from a 1Q exit rate of 8,500 mmcfe/d, to a year-end exit rate of 18,000 mmcfe/d. They also say that if that goal is acheived, with $80 oil and $7.50 gas they would end up generating $35-$40 M in EBITDA.
I believe their goal of getting to 18 mmcfe/d by year-end is a bit of a stretch, and probably will not be achieved. However, they have sandbagged the EBITDA calc with such conservative commodity price assumptions that they will likely at least get to the low end of guidance, even without fully acheiving their production goal.
Based on 1Q average production rates, a significant amount (about 2/3rds to be more precise) of its production was hedged at below-market prices ($75 oil and $8 gas). But as the production ramps up, the hedges become less and less of an issue. Per a call to the company CFO on 6/26, as of that date they had not set any new hedges over those shown in the 1Q 10Q.
This stock is very thinly traded so you IMO don't really have the luxury to wait until the good news comes out and then buy on the news. In light of the fact that they just finished a record quarter (which will probably show, for the first time ever, positive earnings), I believe it behooves you to start building a position now, so you don't have to chase it after they have put out a blockbuster operations update and/or after they put out the very positive 2Q financial results. |
