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Gold/Mining/Energy : Canadian Oil & Gas Companies -- Ignore unavailable to you. Want to Upgrade?

To: kingfisher who wrote (6357)	5/2/1999 2:21:00 AM
From: mike smith	Read Replies (2) \| Respond to of 24892

Richard, on the surface Scorpion appears to be a great buy but a little digging would reveal otherwise. At the current stock price of $0.50 and given shares outstanding of 9.8 million (fully diluted) and net debt of $8 million the cost of acquiring the whole company would be in the range of $13.0 million. Based on year-end production and reserves that works out to just over $10,000 per producing BOE (an absolute steal given that 80% of production is gas) or $6.78 per proven BOE (which is better than average price paid of approx. $7.50 per proven BOE). So what's the problem ???? The fact that Griffiths Mcburney has been unable to sell the company over the past 5 months signals a problem. I have talked to several parties who have been through their data room and the key concern they had is the steep decline rates of some of the Company's core gas production. Also it appears that the dispute with Circle Energy related to the working interest in the Brazeau well is going to reside in the courts for a while. The company is currently maxed out on their credit line of $8.0 million so the only capex they can undertake for 1999 will be whatever they can generate in cash flow. Therefore we can expect very little growth in production in 1999 (maybe a net loss in production if the decline rates are high) With no money the company will need an equity infusion to be able to develop its prospects. In this poor equity market Scorpion's only hope is for a suitor to come along and provide the necessary capital. My biggest concern, other than their poor financial condition, is the low amount of reserves they have. For starters the company had a terrible time adding reserves in 1998 with an average finding cost of $10.38 per proven BOE (it would have been much cheaper if they would have gone out and bought reserves). Proven reserves at December 31, 1998 were just under 2 million BOE. If current production is as you say 1300 BOE per day that means they have only 4.2 years of reserves life !!!! Another problem is that the company's reserves were evaluated by Outtrim Szabo - an extremely aggressive small engineering firm. Therefore there is a risk that some of the reserves are overstated. As the price continues to drop I imagine that eventually the company will be sold. For now they have no capital to fuel growth so they will sit dead in the water until they get bought up. In my opinion, Richard, there are many other juniors with a lot less uncertainty to put your money into. One man's thoughts. Cheers Mike