RE:WOW....IVANHOE ENERGY DECLARING BANKRUPTCY....Ivanhoe was an oil/gas producer in name only.
It is not good news for oil companies with huge debt AND little or no cash flow.
Its bankruptcy will have a cooling effect for a period (hopefully a short one), as uninformed investors thing an energy compnay has gone bankrupt, so others with debt might follow the same course.
The main difference between Ivanhoe and LRE is production and cash flow - the former had very little, thus was unable to pay its debts. LRE on the otherhand has 100 million plus in cash flow
I say 100 million plus becuase the actual number is presently unknown. All we know with confidence is the company has told us it will internally generate 100 million in 2015 to pay its current 2015 cap ex budget. I suspect that is a conservative figure, on which we can add their interest expense.
Its also important to remember that LRE could drop to a very low level of cap ex (just enough to maintain leases) should it wish to, and just harvest cash flow. In this model, prodution will decline - initially at about 20-30% for the first year, then after that at a much slower rate. The cash flow from that strategy would be far in excess of debt service requirements. I point this out, not because its a possible strategy, but to point out that such a worst case senario would keep the company out of bankruptcy.........rather like being in an unsinkable lifeboat.
Of much more significance is the new LNG tax structure announced by the Fed Gov of Can late last night. This is big news for many reasons - two of the big ones are.
1. The Canadian Gov is demonstrating it will do whatever is needed to make the LNG industry happen
2. A major hurdle in development has been removed (essentially the write off rate has been increase dramatically)
Of near term importance is the cold weather in the US NE............thats the Nat Gas burning area, and that area is getting hit by very cold weather...........the forecast looks like it will extend to the end of Feb (might go on longer, the forecast is only reliable for a week ish, so can't yet see into March).
From where I'm sitting, I continue to accumulate all the LRE shares I can afford. I'm not trading it, I'm accumulating - at these levels I'm not fussy about the price I pay.
I accept that LRE production is going to decline (as it is for the whole industry).
I accept this decline won't be really noticable until the end of the year (same for the whole industry)
I accept that this decline will lead to much higher prices for both oil and gas, albeit on a smaller production base. I also belive this production delcine can be easily regained once higher prices resume
I believe that the Canadian Banks are so well protected in Canada (Oligarchy), that they will not find themselves in the kind of financial distress that would cause them to call in their lines of credit to the likes of LRE. I believe the Canadain banking environment will allow the banks to give their oil/gas borrowers the time they need to return to financial strength.
I believe that the LNG industry is going to get established in the US (first exports in 2015) and Canada............all of which will bring global Nat Gas prices to North America, and LRE. In Japan they are currently paying US$14.31 for LNG imports (multiply that by 6 and see what you get)..............not so long ago it was $20................now imagine what LRE's cash flow would be if all their gas was sold at the same price as their oil? Then imagine what it would be if oil was $100/bbl, and production was 50,000 bbls/day. These are not crazy numbers...........the only thing that gets in the way if LRE is prematurely acquired. Infact, 5 years from now, they are likely conservative numbers. This is likley what Templeton is looking at, and why they've taken on such a large position.