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Analyst Website: www.microcap.com
Contact: D. Deadlock microcap@telus.net
Date: July 2008
Assuming a public company listing goes through as scheduled, they expect trading to commence by September. At this stage they hope to have approx. 10 million shares outstanding and an estimated 125 shareholders.
To ensure funding is available to secure carefully selected oil & gas leases before the prices start moving up, KOS will finance at a few different stages over the next year. Their objective is to raise a total of $4 million by Q1/09 which should result in a structure of just under 15 million shares.
If lease acquisition and drilling goes as planned, they would target for 50 wells on production by Q3/09.
If these wells averaged 10 bopd they should be in a position to generate cashflow on 500 bopd and have significant acreage for exploration and development.
Achieving 500 bopd even at $100 oil (assuming 300 days production) would result in gross annual revenue approaching $15 million and cashflow estimated in the range of $8 million to $10 million annually. If they can restrict share structure to only 15 million by the end of year 1, they can target cashflow of $0.65/share and a reasonable share valuation in the range of $3 – based upon cashflow valuation multiples currently being used by the brokerage industry.
If this production level is achieved, the cashflow should then fund future exploration drilling and development without incurring additional share dilution through financing. If drilling is going as well as planned, it may be very possible to raise an additional $5 million before the end of 2009 to accelerate drilling and acquisitions even further. The share price should be close to $3 by that time so in theory they would be able to finance with minimal dilution and still stay under 20 million shares.
Reserves valuations (current industry standard) are in the range of $18 to $20 per barrel
Proven reserves and stable production are selling in the range of $45,000 per producing bopd
Reserve life of 20years or more is common in Kentucky
Depending upon production and cashflow growth, a scenario also exists to structure the company so that quarterly dividends are paid to shareholders (possible in year 2 or 3). This would have to be balanced with a strategy that maintains aggressive growth through drill bit and lease acquisitions. But it is a realistic objective.
If annual cashflow can be in the range of $10 million going into year 2, it opens up significant growth opportunities while maintaining a tight share structure and clean balance sheet.