Hello,
I've been a poster on the ARN board since I think 2009, before they started the HZ drilling. I'd thought they'd done an excellent thing in assembling that land block and then cracking it open with the new technologies, as did the rest of the market obviously. Over the years I've commented that one needs patience since this is a long term process to get a waterflood implemented and then wait for results.
Well I think they've had enough time and it looks to me like the results are finally in, and the big gamble has failed. Doug said at the AGM that in DMU#2 you could expect to see production increases as voidage was replaced, however that at Ethel/elsewhere where the waterflood was underway that you wouldn't see increases in well production, but a flattening of the decline curve.
So: if they quit drilling to day, it looks like production would flatten out at around 4,000 b/d hopefully for the long haul, even with waterflood support, based on what mgmnt had to say. And that volume has to repay $320 million in debt just to get out of debt. That is ridiculous. At a $35/bbl netback and 4,000 b/d you would cash flow something like $40 mm/yr, or if applied entirely to debt 8 yrs would be required to pay off the debt. That's with not another nickel spent on drilling producers or injectors. If there are modest declines and you need to drill even 2 wells/yr plus maybe an injector, that would take up 1/4 of your cash flow, and debt repayment would stretch to 11 years. If prod'n stayed flat for 8 years at 4,000 b/d and looked like you had another 15 yrs worth at that point, it might pan out for the patient investor but that would be the weirdest model yet for a junior to be successful at.
The deciding factor for me is CPG's refusal to take this thing out a bargain basement price. Last year at this time CPG needed to issue ~ 1/7th of a share to buy ARN, and everyone thought that was imminent, myself included. Now they need to issue ~ 1/30th, or say 1/25th to get tired shareholders to unload - and they still won't do it. So, you'd have to assume CPG doesn't see ~$500 million in value here (cost to acquire equity plus o/s debt). Not only that, 4,000 b/d of light oil with flat line production for 15 years is a dream property for a high yield vehicle like CPG, there are very few properties like that availabe, that are such perfect cash generating machines. This one is on sale and CPG is saying we're not really interested.
I have held onto a material block of ARN shares through this debacle and am obviously sad about that. But in hindsight the writing was on the wall: as I noted a few years back on a post, there were warning signs because these same guys acted out the same play on a smaller scale at Hamburg, with similar results. In 2007/8, they had some serious volume predictions for Hamburg, and assured the market that you needed patience to watch Hamburg unfold; waterfloods were expensive but worth it in the long run, a junior like ARN spending big $$ on a waterflood was unusual and showed how bright they were and with great long term vision. And where is it now? Hard to say really, don't hear anything about Hamburg, but the Grand Investment up there did not pan out as promised. Why should anyone have believed them after that example?
And finally, the last straw was to see poor Doug up there humbly facing the crowd, telling us that they'd learned their lesson and the days of overpromising/underdelivering were OVER. Then 6 weeks later...well I don't need to get into that do I...
On to the next one? GLTA is all i can say. I'm gettting old enough to say that with respect to the junior o&g gig I think I can say i've seen it all. Of course that's not true but I have seen enough to make me rethink participating in this racket ever again. Of course all juniors are out of favour these days, and when the tide turns they will all come roaring back, even ARN to some extent. But unless someone finds a hidden gem on all these Swan Hills lands, this is Rider Resources all over again. If you're not familiar with that story, they got taken out by Nuvista in ~2007 at about 15% of their peak share price, you can view the subsequent happy chart for NVA at your leisure...
I am going to hold on to the rest of my shares for now, I think there is a pretty good chance at a 50% upside from here in the next little while. but if I see something else that has a decent certainty of getting near that I'm gone like a shot.
Happy investing, over and out for this board.
opg210