RE:RE:Topline Royalties Carry a bigger costCheezies, its like this, i am here not to represent ARC but a potential investor interested in TOU, in fact you may of missed it but i did not mention ARC in my entire post. You have a fixation regarding ARC, and you can't get over the fact you paid 60 dollars for TOU, never sold a share, and never made a dime apparently.
There are consequences of spewing out these royalities when commodity prices are trading at the low end of the cycle, which is pretty much what TOU has done is really a disservice to the share holders. Givening 4% off the top, when the costs, taxes, enviromental costs, Op costs, royality structures are alway changing really does a disservice to TOU loyal shareholders. The management put Topaz shareholder ahead of TOU shareholders, and i am sure without a doubt that management loaded up on those Topaz shares and options themselves.
6 dollar gas
So at six dollar gas the royalities are $1.44 boe (It gets better)
10 dollar gas ( The money is better in the hands of Topaz shareholders )
The royalities are $2.40
12 dollar gas ( One big happy party, with Topaz getting all the presents )
The royalities are $2.88
So if TOU is producing 300,000 boe of gas and gas goes to $10 dollars a MMcf, that mean they will be paying 65 million a quater in royalities for natural gas. Add $2.40 for every boe of oil and condensate bump that up to 75 million dollars a quater or 300 million dollars a year in royalities.
I guess TOU shareholder might hope that Nat Gas does not go to $10 dollars it would cost them a lot? They will never see it anyway it off the top.
TOU Management had Taking the Iceing off the Cake and funneled it into Topaz and Left TOU shareholder to eat the crumbs. 4 percent off the top in terms of gas this is a lot, it likely reduces net backs 6-7 percent.
You better hang on to those share of Topaz as management has sold the TOU shareholders down the street.
Interest only Loan Equalivent
If TOU pay 300 million in royalities forever, and they could borrow money at 2%, it is like paying an interest only Loan payment on a 15 Billion dollar loan.
Reduced Values of property 7%
Now if you want to divest land or sell a play or do a transaction, the economics are depressed by 7% to the potential buyers, in oil and gas land deals are happening all the time. Just think of all the extra effort to manage and track these overrides.
Under Capitialized for Topaz
I also think the 2.3 million acres of Tourmaline will ultimately be significantly undercapitalized with so many acres owned by one land owner. TOU exploration budget is just not that big, in fact they pride theme selves on being on the cheap side of the equation.
So i think they created a illusion of having zero debt and that the cost of TOU having debt has just got multiplied by a factor greater than 2X with the royalities being a boat anchor tied to them forever.
These royalities will impact TOU future growth and evaluation.
IMHO