RE:RE:This part is smart .its's billliant...
sclarda wrote: divime1 wrote
We have entered into an agreement with Equinor to hedge approximately 70% of the production for 2022 and 2023 (NBP forward strip is currently ~$22.00-$23.00/mmbtu for 2022 and ~$14.50-$15.00/mmbtu for 2023), and have also agreed to a contingent payment on a portion of the 2022 revenue if European gas prices exceed a certain level. The contingent payment will be calculated by multiplying 12.5% of 2022 production by the difference between average 2022 NBP prices and 102 pence/therm (~$17.25/Mmbtu), provided this difference is positive, and up to a maximum of US$25 million. The structure of this transaction, including the deal contingent hedges, allows us to lock in the majority of cash flow for the next two years during a period of unprecedented high European natural gas prices, and also provides high certainty of an approximate two-year payback period. The estimated cash payment on closing and the estimated payback period includes the impact from the hedges and contingent payment
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At first glance this purchase seems to be a smart one. The purchase cost is aprox. $556 million Cdn. and the Free cashflow per year at the prices they hedged at for 2 years is aprox. $361 million. The purchase should be completely payed for in aprox. 1.5 years.
From the way i read the news release it appears that VET will be getting production from the new asset from the beginning of 2022 but the deal will not close until sometime in the second half of next year. They are forecasting that by closing the cash payment they will make after taking into account the profits from the first half or more of the year that they will get from the new asset will be from $200 to $300 million depending on when the deal closes.
If we take an average of that number VET will be paying aprox. $250 million in cash in the second half of next year for an asset that will generate aprox. $361 million per year of FREE cashflow at current gas prices or a return of aprox. 145%.
With an increase in overall debt of aprox. 15% they have increased Free cashflow by aprox. 55%. Free cashflow goes from aprox. $650 million to over $1 billion. In other words we now have a company in VET with a current market cap. of aprox. $2 billion that will next year generate over $1 Billion in Free cashflow. or aprox. 50%.
Sounds like a very smart move.