Long Run Explor Ltd Ord WFREF

RE:RE:RE:The Absolute Lack of Fundamental Legs

[JohnJBond]

When looking at debt on a relative basis its useful to compare debt to cashflow ratios with comparables.

However when looking at debt from the potential for financail distress you need to look at internal ratios like cash flow to interest etc.

As I write this I do not have LRE's annual interest expense before me, but using 700 million debt and 6% interest, the interest is 40 somthing million per year.     Cash flow at stress test price levels is a bit over $300 million!

Cash flow is far higher than the interest expense - so risk of debt default is low.

Next you look at debt covenants - ie conditions at which debt must be repaid.   I don`t know these as I write this.    I do know that debt holders must be very comfortable before a borrower can pay a dividend.   If LRE pulls its dividend, I doubt any debt convenants will be close to being triggered.

Lastly you look at debt repayment dates.    Their debintures do not mature in the near term.    I don`t know their maturity dates as I write this, but I believe its years away.

Realistically, the only debt issue I see on LRE is pressure to cut their dividend, AND inability to increase their line of credit.    I think this translates into elimination of the dividend (it may or may not happen on Dec 15...........as the monthly dividend is only about 7 million.)      I also think it means LRE will limit its capex to its cash flow.    Limiting capex to cash flow is the normal base case for an oil and gas producer, so nothing negative about that.

ps Trilogy had the same dividend as LRE, and cut it this morning.    Trilogy is very similar to LRE in terms of similar debt, similar production etc.     They have about half the shares, so share for share you should cut its share price in half to compare to LRE.    That makes Trilogy a $4 share  (after cutting its dividend) vs LRE $1.53.