BNP Resources - July 2016 Letter to ShareholdersRE: July 2016 - Monthly Letter to Shareholders Dear Shareholders:
The purpose of this monthly letter is to bring BNP shareholders up to date since the last letter.
- Met with our property salesman, on July 1st, in NW Calgary, to talk about the acquisition possibilities. He met with our target company on July 28th. They have one other offer on the table, subject to funding. Our offer is a little higher but also subject to funding. They are open to a deal, where their management and board of directors would join our management team. The target company have an established board of directors, well known in the local oil and gas industry. Our salesman is working on getting us a referral to an agent in Connecticut, where we will seek to raise $75 million, of which $35 million is for the acquisition. The target company are the new owners of the Jensen leases, which BNP had to give up, in 2014, due to lack of funds. Commissions on a $35 million purchase would be paid by the sellers. Commission on a $75 million equity raise is estimated at 5%, or $3.75 million, with a net of $71.25 million. This would provide $36.25 million for our development program.
- This proposed deal consists of raising private equity to fund a holding company with the following subsidiaries:
- Oil Production company – 90% of capital
- Midstream subsidiary – Facilities and oil trucking services
- Electric utility company – Power generation and distribution in SW Alberta (Jensen & Ferguson South)
- Orphan well abandonment company
- Alberta - Yellowknife Pipeline
The midstream and utility companies will provide infrastructure and earn a 9% return. This allows the oil production company to keep the recycle ratio greater than 2.0, in a low oil price environment. BNP Resources will attempt to negotiate an 18 month option to invest in the midstream, utility and orphan well companies, at initial costs, plus 5%.
I am proposing that BNP contribute the Jensen wellbores, in return for $500,000 in shares of the oil production company. This helps our LMR account with the Alberta Energy Regulator, by reducing our required deposit by $200,000, once wellbores are transferred.
The orphan well abandonment company would be funded with about $1.5 million, to abandon orphan wells, on a lump sum basis, payable upon completion. The first contract will involve approximately 5 BNP abandonments (4 surface reclamations and 1 abandonment). Budgets are approximately $160,000 and our goal is achieve a gross margin of 20%. We would work with the AER and the orphan well company to pay out, after all reclamation work is finished. The remaining $200,000 would go to the CRA, as payment towards our past taxes owing (working capital deficiency), related to flow through shares. Research indicates that abandoning orphan wells could become a growth business in Alberta. Many companies such as BNP have cash deposits, held in trust by the AER. For example, BNP have $360,000 on deposit with the AER, but the AER will not release any funds on deposit, until all of our licensed wells are abandoned.
The oil production company will negotiate a farm in on the South Ferguson play. If successful, BNP Resources would farm in on the South Ferguson (Montana extension) play. This is the final key to the puzzle in rebuilding our investment. Our balance sheet will be much cleaner at this stage. BNP benefits through drilling and producing this farm-in play, for which we could earn 50%, after payout. Equity financing will have to be raised by BNP, which shouldn’t be a problem if Ferguson South is a success.
Once the AER issues are resolved with BNP Resources, we will have a working capital deficiency to resolve. Shares will likely be issued in the $0.10 - $0.15 range, to clear up the working capital deficiency.
In order to start trading again, we’ll require about $150,000 - $175,000 to complete the 2013, 2014 and 2015 year end returns, pay exchange fees, file income taxes, and file news releases. We will be competitive bidding the audit services and possibly using firms from Vancouver, to reduce costs. We may also bring the accounting in house.
I will continue looking for strategic alternatives that could add value for BNP Resources, and shareholders.
- I talked with one of our shareholders two weeks ago and we talked about getting a deal done, so that the shares can start trading again. Now that oil prices have stabilized in the $40 - $50 range, we have better prospects. I appreciate the chance to talk with our shareholders and to keep you posted on events.
- The oil business is in a different reality today, compared with the past 10 years. I see many similarities with the 1980’s, especially post 1986. The 1980’s were very successful for Renaissance Energy and others. It was easier to get deals done in the 1980’s as there wasn’t so much government involvement in the industry (LMR deposits, AER, etc.). CNRL really started growing in the 1990’s and is now one of the largest gas producers in Canada. Valueline is a good source for comparative data on CNRL.
- Lots of oil and gas bankruptcies in the USA and Canada. Tuscany, a Bob Lamond heavy oil company (Winter pool), is the latest Calgary casualty. Bob used to run Czar in the 1980’s – 1990’s.
- I’m available to talk with shareholders, during BNP office hours, Monday – Friday, 4:00 pm – 6:00 pm Mountain time. If I don’t pick up, just leave a message at 403-978-6376.
- Rock Energy has been taken over by Raging River (RRX). Although the purchase price was much lower than I predicted, I still believe that Raging River will be the “next CNRL”. For anyone that bought Rock (as I did), I suggest holding your RRX shares for the next 10 - 20 years. I had a chance to own CNRL shares in the 1990’s but thought that they were a little overpriced. I was wrong and should have held for the duration. RRX are now close to 20,000 barrels per day, with limited debt.