Ouch: Loan Shark Rates11% is a pretty good interest rate on a loan. But reading the fine print, the interest rate rises to 16%, in the event of a default.
Considering that Zargon runs around $26.68/bbl operating cost, likely most of the Canadian production is shut-in at the moment, to at least kill the variable cost component. Selling oil for $21, when it costs more than that for just the llifting costs, doesn't make positive cashflow.
So this loan is all about keeping the US properties running, and hopefully for getting some additional US production onstream, not just trying to restore production to some wells that went down. The Canadian assets will have to wait, till prices are higher.
We need to take a close look at the "Events of Default", and be prepared for possible situations, if pricing doesn't improve, rapidly:
8.5
EBITDA. Zargon (ND) shall maintain EBITDA of at least $1,750,000 for the trailing twelve (12) month period ended on the last day of each calendar month commencing with November 30, 2018. Provided that EBITDA for such trailing twelve (12) month period is at least $1,250,000, Zargon (ND)’s breach of this Section 8.5 shall not be an Event of Default if Borrower makes monthly amortization payment of $75,000 of principal per month, on the first Business Day of each calendar month after such breach until such time that compliance with this Section 8.5 has been regained. For the avoidance of doubt, if Zargon (ND)’s trailing twelve month EBITDA as of the last of any calendar month is less than $1,250,000, it shall be an immediate Event of Default not subject to any cure or grace period.
So this suggests there'd better be good cashflow from the US properties, or else. Difficult for us to understand the ND pricing, but it better be alot better than the WCS pricing, to ensure there are some EBITDA.
Another clause, relates to production:
8.10
Production. During each calendar month, Zargon (ND)’s average daily production for each such calendar month shall be equal to at least 300 barrels of oil per day from its Hydrocarbon Interests from the Collateral. Provided that average daily production is at least 240 barrels per day during any calendar month, Borrower’s breach of this Section 8.10 shall not be an Event of Default hereunder if Borrower makes an additional monthly amortization payment of $75,000 of principal per month, on the first Business Day of each calendar month after such breach until such time that compliance with this Section 8.10 has been regained. For the avoidance of doubt, if the average daily production during any calendar month as of the last day of such calendar month is less than 240 barrels per day, it shall be an immediate Event of Default hereunder not subject to any cure or grace period
So we'd better hope that there are solid development opportunities, to maintain the production rates. No room for technical errors here: the workovers had better work.
Q3 North Dakota production was 396 boepd, so we'll hopefully be okay on that criteria. EBITDA can be a little confusing to sort out, when Canadian and US cashflow, is lumped together. I have to assume they have looked at this, and will have better US pricing, than the WCS priced oil.
Not impossible for Zargon to recover, but will require fast movement in the WCS price, to get the Canadian properties producing proper cashflow.
The loan can still be used for "Working Capital" and "General Corporate Purposes". Will they be paying the March 31st debenture interest, with the proceeds from the loan? That would allow them to stay in the game, and avoid stock dilution. But everything still depends on a rapid rise in the WCS price, and some proper results from US work, not more of the same high Canadian operating costs, due to marginal assets, that generate little cashflow.