MD&A Analysis Now that I was able to nibble on a few shares... I intend to increase my position in this play and become more active in my analysis. I posters are welcome to IM me their thoughts/understandings.
The MD&A covers many of the topics which were not covered in the NR. Overall there are some significant positives and some negatives. To summarize:
Net production rate for the quarter was highly impacted by facility/surface/operational issues. This resulted in a decline over Q3 (1259 vs 1373), a negative. This is because of poor uptime (facilties issues amplified by electricity/flooding) relative to the average net production capacity of 2,100 for the quarter (2760 gross). This seems to be partially resolved (average production of 1,400bopd net, 1,900 gross) by the end of the year with capacity increased to 3,100 bopd, a positive. The company noted that this capacity is supported by equipment and the reservoir which would imply ~2500bopd net production with uptime improvements.
Netback was substantially worse during Q4 at $36.1/bo even though realized price was higher at $68.7/bo. This is mostly attributed to a one time reclassification between PP&E resulting in the high opcost of $33/bo vs. $23/bo for Q3 and $23/bo for 2011. The company notes that opcost/bo should drop as production increases. If the one time expense is trully "one time" (I expect it to be tied to field ownership change/startup, which may result in 1-3 more instances) then operating costs should resemble prior quarters or even a bit lower. I expect $20/bo in the intermediate term, which would result in a $48 netback at current pricing.
Based upon a 2013 avg production of say 2000 bopd and a $48 netback, OPCF is $35MM. Subtract out $10MM due to field transition/startup costs, facilities uptime improvements opex short term capitalization, and acute decreases in production and you get a reasonable OPCF of $25MM (ignoring Delvina)
2012 CAPEX at $24.7MM compares to 2011 CAPEX of 26.1MM. Given that work programs will probably be similar in magnitude (lots of field startup in 2011, a delvina well in 2012, additional delvina work/wells in 2013), I expect a $25-35MM CAPEX for 2013. This would indicate a continuation (and possible slight increase) of the current working capital deficit of ~$15MM. This feeds into...
The company indicates that current CF can support ongoing operations but additional capital will be required for 2013 exploration and development. This is in line with the above. The MD&A states that mgmt is in the process of identifying said capital and close to securing.... I personally would like for them to secure ~$20-25MM in capital, of which ~$10MM would be equity. This would prevent any increases in their 0.6 debt/equity and would likely be their last equity offering.
Reserves seem to have increased. This is alluded to in their depletion expenses section where they state that depletion expenses are lower due to increased assessed reserves (the larger the reserves, the lower the depletion expenses per bo produced). This may be expected from their increased activity (as more wells are taken over and histories are established), however, I consider this to be a positive because it validates field performance and adds credibility to the DCF10AT numbers that were provided a long time ago (They may have also marginally increased).
Forward work: WF seems to be quite mature w/ 2013 expansion (good, startup can be tricky). Delvina is on schedule (I still expect it to be delayed into Q3-Q4), but IMO of lesser importance. Takeover of their third field is expected to take place in early mid 2013 (probably with/shortly after their capital raising), a positive if timed correctly. Additional artificial lift upgrades/reactivations should further increase production capacity from a facilities/RE perspective and/or enable 2013 plateau-- I expect the 2000 bopd 2013 avg to be a mid-case, excluding the takeover of any additional field/areas.