Why Astra and Fire Sky did these deals
Both Astra and Fire Sky (private equity) even some months ago were starting to make a lot of money with their southeast SK wells....they are very cheap to drill, and very prolific. Very high returns or these wells. So high, in fact, that both Astra and Fire Sky were starting to pay income taxes to Canada on their profits....up to 20% rate I think....if I remember from looking at the merger docs.
How do you stop paying high income taxes on profits? As an oil company. Especially when you want to keep drilling, and envision making even more profits from your drills? You get a company with $500+ milllion NOL carryforwards (good for the next 10 years) to "buy" you out.
All oil and gas wells eventually have to be P & A - but not as long as they keep producing.
So this "expense" should be viewed in conjunction with the O & G reserves of the company in question.
Surge issued $200 million of its stock to these 2companies for their SK assets and production. These profitable companies own a significant percentage of Suyrge stock. They went into this deal with Surge with their eyes wide open....it was also good deal for Surge as it made their bankers happier; it was a good deal for these 2 companies as ultimately I expect them or the private equity behind them to acquire the majority of stock in Surge and run the company in 2 years when Paul leaves. They will then have the publically traded Surge corporate shell and other long term producing assets.
I think this will all work out in the end. The$500 million NOLs are worth about 20 cents on the dollar - or about $100 million in themselves -- to an acquirer if at some point you eventually have the taxable gains to even them out. and fully utilize them. But again, these NOLs are good for another 10 years or so before they expire -- so they will probably end up being fully used over the next 10 years These NOLS in themselves add another $100 million value to the Surge enterprise to an acquirer. Fire Sky and Astra are basically acquiring Surge at this point - not the other way around.
I am looking for Surge stock price to eventually double from here. Maybe not aparent now while the stock is under pressure - we may be starting to see some tax loss selling even now given the history of this stock and the fact it is way down from its highs of a few years ago - but I think if OIL prices hold around $75 WTI by this time next year stock will be up100 %. So I have bought a lot of this.
But hey - 1 year from now if prices stay anywhere where they are now a ton of money will be paid back to the bankers and Surge financials will look much much much better than presently and Surge will probably even be paying a dividend again.
Paul is eventually exiting out and wants out at $10 a share -- which is quite doable if prices hold at $70-$75 WTI - which I think likely.