Bonus Royalties While onedaylate wants the readers to believe that the bonus royalty for the four (4) properties is a crippling 80% , leaving 20% to ROI. He writes “ They got their first three blocks at auction with a cripplingly high royalty rate. So high that they could never make any money on them. It was more of just a way to endear themselves with the Mexican government.”
Here is the reality. The bonus royalties and acreages are as follows;
Mundo Nuevo 6,895 acres, bonus royalty 80.69 %
Malva, 5,239 acres, bonus royalty 57.39 %
Topein 6,251 acres, bonus royalty 78.79 %
Ponton, 2,965 acres, bonus royalty 21.39 %
The average bonus royalty is 59.565 % or 60% , not 80 %.
So, on average, for every 100 barrels of production out of these properties, after a bonus royalty of 59.565% then ROI keeps 40.435 barrels out of every 100 produced.
I am not sure why the bonus royalty rate is such a big concern. The ROI management were smart enough to see that this was an incredible gift to a start up company. ROI had to bid these rates in order to obtain the properties. ROI ranked the value of the properties and bid accordingly. The three properties other than Ponton were all won with a margin of about 2.0 percent above the next highest bidder. So if they didn’t bid this level, they get nothing. ROI went after the properties that had production and cash flow and secured 3 out of 4 of the cash flow properties. The Ponton property was not as high of a priority as it was not a cash flow property and they were outbid on that property by a large margin. Ponton came to them because the winning bidder did not complete.
So what did ROI gain? It gained 1,700 BOE daily production. In Canada or the U.S.A. ROI would have had to pay about $40 to $50 million U.S. Dollars, to obtain, all for free, for nothing. They were not only for free, ROI was paid to take them.
How much dilution would they have had if they had to pay $40,000,000 for the properties, and in the U.S. they would likely still have had to pay a royalty of about 30%.
They have four real good properties for nothing.
ROI also obtained a cash flow on an average of about US. $400,000 per month, which none of the other bidders obtained. Over the past 22 months that is gift of about $8.8 million.
That money cut the burn rate of funds to near zero while they were waiting for permits. The money raised from placements can be used for exploration and acquisitions.
Think about how much dilution has been saved. Or, think of it another way, the Mexican government not only gave them the properties, but gave them most of the money to drill all wells required to complete the work program. The drilling and work overs of the four wells they are going to drill this spring and summer will cost about $10 million and they have already had cash come in from the properties of $8.8 million. Sounds like smart management and a good deal to me. ROI reports on the website they anticipate increasing production by 3 times though this drilling. If that is true and the production goes to 5,200 Boe, then cash flow goes put to about $1.2 million per month. Again, sounds like a good deal to me. Every three months they have enough cash received to drill another well.
Because of having the funds they have put together an excellent team, one good enough for Lukoil to want to partner with ROI.
Production costs are among the lowest in the world, if not the lowest and because of the low production costs ROI can make a profit even with these high royalties and low prices. Not many companies, around ten percent, in Canada or U.S. have been able to do better in the past two years.