ARHT Media Inc V.ART.H

RE: RE: RE: What of this odd coincidence of always

[GreatSwami]

Interesting question slickk1.

First note that Niko is the Operator here - Vast are the "silent partner." The operator has plenty of cash flow to cover the well project costs and any contingencies or overruns. To be safe one could simply buy Niko shares and the downside is covered - and the upside of course will be equally muted.

Secondly companies operating on international projects are different than companies operating domestically.  Here in Western Canada I have seen companies abandon wells that could potentially turn into company wreckers - or that go horrendously over budget. they do this to live to fight another day. I have also seen Management throw their own money into the pot as short term shareholder loans to "Git er done!" I have seen partners go on penalty as they have been unable (or unwilling?) to meet the cash calls. I have also seen many companies do the quick Short Form Private Placement thing too. (kind of like the management whip round but spreading the risk reward out to close and well heeled friends).

All of these things are done when a project that the company is involved in - and believes in - requires deeper pockets than at first anticipated - and of course they will typically bail out if things look disastrous.

Most projects here in the WCSB are things where the per well cost is from
.4-$2.0 million for a completed vertical, or from $1.0-$6.0 million for a completed horizontal depending on depth and difficulty. Most companies that are involved on a non operated basis are exposed to 50% of the cost - or less depending on working interest. That kind of money is easy to raise - together with a suitable working contingency amount. Here too most wells are quite accurately budgeted and overruns are rare because the whole region is so heavily explored and there are only a very few areas where the unexpected can bite you badly. Wells in Kurdistan can be one to two year projects and even when all goes well cost $30-$50 million - with a risk of doubling or tripling that cost with severe problems...

When you go to do a deep structurally complex and operationally risky well in the international mountain fold belts - you need really deep pockets to meet contingencies. For Vast they probably figured that they had their budget covered and they had enough for some (but not all) contingencies too. There is also the consideration that the management probably fully expected a more significant Share Price escalation during drilling - and perhaps if the Shiranish had come in much shallower they would have encountered excitement sooner. Whatever the reason they probably wanted to raise additional funds at a higher SP to avoid early severe dilution.

It would seem to me that they got caught out - the well is taking much longer than planned to drill, they had more difficulties than they expected - sooner than expected perhaps - and the formations are much deeper than they thught - and because of this the SP has stayed relatively deflated. The gamble did not pay off - so they need to go to the well to fetch some more financing to "git er done." So be it! They (and we) would all have preferred doing such a thing at a (much) higher SP. That after all is the nature of the game. But when a company like Vast - a non operating partner - gets into bed with an operator with much deeper pockets and costs go up - they face a choice. Either keep within your original budget but dilute your working interest by giving away appropriate shares of the project to others who are not in a bind - you do this if you think your prospects for success look slimmer as time goes on - or you pass the hat around and keep up your end of the cash calls - if you think you are better off staying the course.

Vast has had to pass the hat around - and while that is somewhat embarrassing - and of course costs management nothing in their own pocket book - they are acutely aware of the need not to lose too much face with the friends who did step up to the plate and ensure the cash calls get met in a timely fashion. At this stage of the game I view that as mildly positive - if they knew absolutely they had a lame duck here they would have simply shed some of their working interest or bailed. The only reason they get anyone to pony up is because they can still convince themselves (and more importantly others) that they still have something very worthwhile here.

I know this situation only too well - I have a position with a small private company that has a (small) percentage working interest in acreage in the greater Cardium trend north north west of Calgary. The operators on those lands (there is more than one project and so different operators) are suddenly getting aggressive with their drilling programs. (Go figure eh!) Now myself and the other Directors have a choice. (Our company has very little cash and cash flow - enough to keep the lights on and pay the phone bills) so what do we do now we are faced with all the well drilling and completion cash calls? We can simply give away our Working Interest for whatever one of the other partners will pay. We can go on penalty - that means we pay nothing but go on a 400% payout penalty on the wells we cannot pay our share of. (That means the well has to pay 4 times the overall well drilling and completions costs - which of course they never will - before we can collect any cash flow from them). We can simply sell the company. Or we can have a whip round amongst ourselves to loan the company money at a nominal interest as shareholder loans - and hope our success on the well completions pays out more in cash flow than we have had to ante up in loans. This situation is not really all that different to that of Vast's in Kurdistan - all it takes is a close examination of the potential risks and rewards and a choice as to what course of action should be followed. In our case we are looking at building the Company up from very humble beginnings to something more substantial - and to do that we need cash flow and we need to participate in a few well understood projects. There are never any guarantees - and we could come out worse off by participating as these MSF fraced wells are exensive and the returns somewhat meager - but if we thought it was a completely hopeless cause we would just go on penalty and keep our cash intact. If it is successful we have plenty of chance to follow our luck as these projects are very repeatable and our operators would love to drill it all up if they can make a buck doing so.

I don't know if that is a complete answer - but i hope it provides a bit of insight.

As a note of caution - and in the interest of balance - some of my friends have bailed on Vast - they don't like the current uncertainty and they feel that they can get back in when and if success is announced and are quite willing to miss the first gap up - if there is one. No two people will ever assess the risk reward profile here in quite the same way - and that is a Good Thing. For those that want to sell there are buyers who will help them out - and for those that wish to buy there are shares available at a fair price so they can get in. It is a reasonable Market.

GS