Niko Resources Ltd NKRSF

Free Fall

[Storck]

for what its worth, here's Scotia's take on NKO from a couple of days ago:

Revisit:  Niko Resources (NKO, SP, $14 TP) Looking at a Few of the Details
Our Sales Desk had a chance to revisit a few points of the overall NKO ops update, and our re-read hints that NKO is likely facing a short term dire financing constraint prior to receiving increased cash flows from April 2014 onward after the India gas price increase is realized.  The Indonesia farm-outs suggested that NKO received an up-front payment from HES in exchange for assuming a future well commitment on  the Semai PSC.  In doing so, NKO also agreed to take a 100% interest in the Kofiau PSC… but with the effective date prior to the Elit-1 well (which encountered gas with what appears to be a non-commercial sand package), suggesting that NKO accepted a liability for the block.  In essence, NKO increased its WI in two blocks that have had limited recent success, but appeared to receive some up-front proceeds in exchange.  While NKO didn’t disclose the distribution of Madagascar vs. Indonesian proceeds in the $40 MM of proceeds, the contribution isn’t really material…in short, NKO is taking on high cost debt, selling down assets and seeking to cut capex in an effort to maintain sufficient liquidity to last until the April 2014 CF increase.  Gavin and Setareh on the Research team suggest at least $50 MM of incremental proceeds and possibly $100 MM may be required to bridge the liquidity gap.  Given the pending bank line revision and NKO’s current rig commitment, spending appears likely to exhaust cash resources within the next three months.  It is then a “press-release by press-release” update on whether NKO will maintain its financial position long enough to avoid defaulting on contracts.  Ultimately, our Sales Desk is interested because it could represent a great buying opportunity in the shares.  We’re not clear on whether an equity issue into a 2014 CF increase is feasible (…still a lot of “what if” risk on the Indian Government side, at least when the downside case from an NKO shareholder perspective is a near-to-insolvency event).  The underlying asset value and growth potential of India alone (under a higher realized price scenario) would make NKO attractive…the question is how much the current liquidity issues will hurt the share price in advance.  NKO’s decision to halt Indonesia drilling despite an ongoing rig commitment suggests that NKO now fully recognizes the dire financial position of the firm (cutting ~$10 MM/quarter), while at the same time seeking (…but not yet successfully negotiating) a deferral of the bank line revision (recall, likely to the $65 MM range…perhaps less?) to Oct. 31…the message appears to be that NKO is now pulling out all the stops to reach April 2014…it is quite a long time between now and then, suggesting that equity is the most likely outcome.