| | | Osage Exploration (OEDV) -- the update on Thursday saying that for the Logan County play they are now producing at double the average rate that they produced last quarter is tremendous news and I'm surprised it didn't have more effect to the stock price. If you take the $1.5M in pre-interest cash flow they generated last quarter (adjusted to remove the big Colombian Equity Tax refund they received then) and layer on another $0.8M of cash flow that would come if they were to produce at their current rate for a full quarter, that $2.3M of quarterly cash flow should be enough to support a reserve-based debt facility of something on order of $23M (this assumes the interest rate would be 5% and the lender would require an interest coverage ratio of 8:1). Considering that Osage had only borrowed $15.5M as of the end of last quarter, if they got a new loan for $23M this should be enough to not only fully pay off the Apollo loan (including the 5% early payment penalty**) but also should provide enough additional capital for Osage to make it to the point where their Logan County play would be self-funding out of cash flow.
For E&P companies, banks used to want to see 6 full months of cash flow from recently completed wells before lending on that cash flow, but I believe that with all the money that is chasing E&P companies now, that time period has shrank somewhat, especially for companies that are drilling in resource plays where the type curves for the wells are pretty well established (thank you Devon & SandRidge). So I'm expecting Osage to refinance the Apollo loan by February at the very latest and most likely several months before that.
The reason I believe that Osage will get a reserve-based loan before February is that I expect them to continue to ramp up their production dramatically in the current quarter. The recent PR did not mention how many wells they had drilled and fracked and started flowback, but which had not been put on artificial lift yet as of the end of last quarter. With any amount of luck we will get this info in the next version of their presentation, which I understand is expected to come out shortly. I believe they still have a significant # of wells that fit into this category and can be put online with just a modicum of effort and expenditure. This additional ramp in production ought to induce a potential lender to further loosen their underwriting requirements on making a reserve-based loan to Osage.
** Interestingly, the prepayment penalty gets reduced from 5% to 2.5% on 10/27/13, which is a day after they need to cure their current default on the Apollo loan or else issue more penny warrants to them. To get around this problem, hopefully Osage can issue some sort of redeemable convertible PIK preferred stock that could get redeemed as soon as, say, 3 months after it was issued, to act as a financial bridge to get Osage past the 10/26/13 cure date. |
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