RE: News--Debt FinancingNow we know how they'll finance the balance of their 07 Cap Ex. No dilution. That might be good, or that might not be not so good, but they bought time to let the drill bit results give the answer.
They added 12.5MM x 12% = $1,500,000 to the annual debt service charge assuming they draw it all down at once [not likely].
If fully drawn, at the current $11 bbl net back, it will take 136,363 bbls every year to service the debt.
Dividing that by 365 they'll need to add 375 BOPD in production to service the debt.
To pay the full 12.5MM back at the @11 net backs, equals 1136364 barrels, or roughly 1556 BOPD over the 24 months term.
That would take a finding and development cost of roughly $8,033 per barrel.
It makes sense for companies to borrow money from the bank and
pay interest while putting the money to work for investors.
This is considered by most to be good business practice that
improves the creation of value for shareholders. However, as debt
levels get higher, the level of risk (or at least perceived risk) also
rises for investors. In Q1 2007, the median net debt to annualized cash flow was 1.6 times, compared with 1.3 times in the first quarter of 2006. Arsenal was at 3.2. If fully drawn immediately, this would put Arsenal close to 3.79 debt to cash flow, after the add of the behind pipe stuff later this month. If it generated 1556 BOPD in new production with this capital, and assuming a 1/7th decline in existing flows, then debt to cash flow would be about 2.35 using the old $11 CF per barrel.
So, I'm content to watch and see what they can do with the drill bit.