RE:RE:RE:My, My People - Have some faith?I'm a realist who doesn't like losing money.
Here's what I'm thinking - the ICD's and the reservior in general are my chief concern. I have no doubt there is a deal on the table and I'm sure many in the investment banking community have come to that conclusion - yet there is no positive momentum on the SP. Canaccord seems to be the only major bullish buyer presently.
I have a sneaky suspicion that the deal is contingent on the performance of the third ICD on 2P5 due for installation in Q3. Reading the May 8th AER application, we see that "various inflow control device technology are being evaluated for use in this field trial." From this, we can infer that STP engineers are still experimenting with ICD's and that the first two ICD installations may be suboptimal - or at least not enough performance to seal the deal. The longer we go without a conclusion, the more likely it is that this is the case.
I'm not out of the STP common, but I have cut back my position and will continue cutting back as time goes on without a resolution.
If we run into July with no conclusion, the buyer/jv partner is likely waiting for the results of the 2P5 test. We will be dependent on that ICD's performance to deliver and the SP will reflect that risk.
I had a conversation with a few engineers who did the original STP reserves report (these guys all sold above $1.80 based on STP's debt structure) and they indicated there is no way to tell ahead of time how bad steam breakthroughs/hotspots will be in any particular portion of the reservior. Despite 2D/3D seismic and core sampling there's just no way of telling. So given that unknown, the performance of the ICD's is critical for future pads. Without ICD's the engineers have to throttle back and it could take years to fully devlop the steam chamber. Also, if more steam breakthoughs start developing and more of the producer needs to be turned off via ICD's, then the lower the production.
If we do head into late July with no news, we are left with the next release due the first week of August. No capital expenditure means flat or marginal production increases. Senlac production will certainly be down.
In that event, the SP will be certainly be lower than it is today. Depending on where it is, I MIGHT RE-ENTER MY FULL POSITION ON THE COMMON AT A PRICE I FEEL THAT REFLECTS THE RISK. Everything is attractive given the right price. If STP has to go it alone, it will be balancing a huge debt and the common SP will gyrate wildly based on production and rumours.
I know we all want STP to succeed, but we also have to be realistic and look at the hard truth. We're not heading back over $1.00 anytime soon - this is coming from the Dave Antony, the Chairman.
So to finally answer your question. STP vs. STP.DB? Here's my thinking:
SHORT TERM (BUYOUT SCENARIO)
STP - I don't see an buyout offer over 50 cents. That's not my opinion but a few investment bankers I've spoken with. Forget the blue sky scenario and NAV's and big reserves. These things mean nothing if the oil cannot be economically extracted from the ground (see Quest Oilsands). If there is a buyer, they are few in number (Altacorp opinion).
STP - stagnant SP until strategic alternatives has concluded.
STP.DB - Get paid while you wait. Guaranteed 2.5 to 3 times return upon buyout.
MEDIUM TERM to 2016 (STP goes it alone)
Crippled McKay eventually gets to 6000 bbls/day. Bank balance is near $10-$15 million with approx. $500 million debt. Asset sales to keep some cushion. STP common is worth $0.50 to $1.00 with high volatility getting there.
STP.DB higher since STP is cash flow positive.
STP.DB ($100k face value, $38k present value) is paid $15,000 in interest payments from now until June 2016.
STP.DB is due in June 2016, but 40% of the initial capital outlay is paid off by interest payments. STP.DB can be paid in common shares or an agreement struck to raise the interest rates/special payments to prevent a default. STP common likely to suffer due to possible dilution/additional payments to debs.
So today given the risk/reward - I'm split between STP & STP.DB. That will change based on the risks I see.
That's it!
Also, do we come to this board seeking different opinions so we can create a better investment decision?
OR
Do we want everyone to say good things about the stock so we can all be happy while we all head over the cliff?