Thread by @WTIBull

So here’s a story about a publicly listed oil and gas companies, and why everything they do, is totally uphill.

Lets work our way through a timeline. It’s May 1st, and we have a balance sheet that looks something like this. $3m in cash an inventory, though a $10m W/C deficit 🧵

So, you have a plan. You just recapped a reimagined yourself, maybe even recapped a TSXV listing, and raised a few million through a private placement. You’re feeling good. You’ve promised you’re going to grow production 2,000bbl/d through your summer drilling program.

You have some cash, but you’ve been struggling the past few years to materialize this plan, so you owe more than your cash on hand to vendors. No big deal, the drilling program is gonna be awesome, you’ll make that all back by the end of the year easy. So, May 1. Clock’s ticking.

You have the land and minerals where you want to drill, so you need a surface lease. You have some holdouts in the area where you want to drill, your ops guy has to go to a few doors and talk to the ranchers individually. Maybe the last operator wasn’t too responsible.

No biggie. This only costs $5,000, and a week or two. All said and done, it’s May 20th, and we have $2.691m of cash. We’re confident in our ability to spud mid-June.

Then you need well licenses. And you realize, maybe you’re drilling on an oil sands lease, so that means you need to submit a special application. The AER says 180 days, but they come back in 3 weeks. Phew. This pushes your timeline into June. No big deal. We’re still on track.

It only cost $5,000 for the AER application, $2.686m of cash in the bank still. Feeling good. Oh, now you need to pay rent, and salaries. OK, $200,000 hit, $2.486m in the bank. Oh, your surface lease payment, and maybe as a new operator your bonus payments.

Now, you’re running verticals for the first part of your program, so surface lease is a bit more than say a horizontal operator. No biggie, you’re out $140,000 for this. It’s a necessary expense. Cheques are signed, money wired. It’s June 15th, and you have $2.346m cash on hand.

First things first, you need a rig. You owe $2m to DrillCo A, so you can’t work with them. You get in touch with DrillCo B’s sales team, and work something out, but they realize you’re in a W/C deficit, and they need cash upfront. $750k to mobilize the rig. No budging.

You reach out to DrillCo C and D — same thing, cash upfront. That’s fine. Fuck, you don’t have an operating line cause your credit is shot, so everything is cash upfront.

DrillCo B doesn’t want to even work with you, but they have you by the balls. Fuck!

They’re charging $3,000 more per drilling day cause you’re a credit risk, now you’re budgeting $45,000 all in for rig, crew, and other G&A per day this summer. That’s $6m of outflows. You realize you need to raise more money — fuck!!

Alright, June 18th — you’re on the phone with your biggest investors. They can wire some more money, but they want a full warrant per share, and the converts are now 18.5% not 14% as before. Okay, whatever. You close the a $2m financing by July 1st, and you now have $4.246m.

Naturally, the brokers took $100,000, but that’s fine. Cost of doing business. Fuck, now you realize it’s quarter end. Management needs to be in the office preparing MD&A and statements for a few weeks. It’s fine, ops guys continue to work away. But, EOM means salaries. $4.106m.

Alright, back to negotiating the rig. It’s July 16th. You wire the $750,000, $3.356m in the bank — they have you by the balls. That’s fine. It covers 20 drilling days and the mobilization cost. You’re good until mid-August. They say they can have the rig on site August 1st.

Perfect. Fucking finally. You wanted to be drilling in June, but what’s two months between friends. Now while the ops guys are getting the pad ready (-$50,000), you’re running around town getting your vendors lined up and praying to god your licenses come through on time.

Fuck, you planned on using acid to frack — but you still owe the vendor $50,000 from last summer. You pay it, you have to. Everyone in town knows. You have to pay some of those bills. The production testing bill is $70,000, the trucking bill is $40,000, and you owe another…

…$300,000 in misc. bills throughout the city, but you need these guys to work for you this summer. Fine, the wires are sent. $2.846m in the bank. Thank god you raised that money.

Now, it’s August 1st, salaries and rent are due. You have some contractors so this month is $220,000. $2.626m in the bank. But fuck yeah!! You just got paid for your existing production, after everything nets out you make $280,000. Hell yeah — $2.906m in the bank.

The rig took a few extra days, but it’s August 4th and you’re ready to spud. The drilling is prepaid, but everything else isn’t. Remember, everyone is working cash upfront, so you stroke a dozen cheques totalling $500,000 and you’re ready to go. $2.406m in the bank.

It’s August 25th and your well is rig released. You have to clean it out, but you’re ready to start production some oil — LFG!! The rig moves to your next location, in the meantime, the ops boys have set the pad up and prepared the site.

Finally, some fucking oil. You produce into an old CNRL battery you bought for cheap, and truck it out daily, but you can taste that juicy cashflow. Or so ya thought. The marketer pays you are the end of the following month. That $385,000 you were so counting on it’s 40 days out.

September 1st. The rig is at the new site. Accrued interest, rent, salaries hit. 2nd well expenses hit. OPEX for the new well hits. The drillers need money for this well again. You need to pay $1.455m. Fuck. This leaves you with $951,000 in the bank. You’re cutting it tight.

All good, the second rig starts drilling. You’re all paid up, and you have some cash coming in end of month. This is your break, your FedEx roulette moment. Then, 3am you get a call from the field guy. Water. The well came up water. Your formation is hit or miss in the…

…first place, but you’re producing all water. Geosteering was off by a few meters. FUCK! That’s $900,000 down the drain. So what are your options here. Raise again, or call it quits. You don’t PR the failure, of course not, this is a “learning experience” — but you’re back…

…on the phone with your major shareholders. You need $1.5m, just to tide you over for the next few wells. This time they want a 30% discount to last trade, and no debt. There isn’t enough cashflow to support. Whatever, they wire the money, and you issue -30% with a full warrant

You’re back, $2,451m in the bank. Your shares out chart looks like this, but whatever, you are gonna be gushing oil soon. You go back on location, it’s bitter, but whatever. You send the ACH to DrillCo B, and they move the rig to your next location.

It’s September 28th, you can feel your marketing money come in. You have $1.301m in the bank after paying for the third location, and you’re ready for some fucking cashflow. Finally. They spud the third well. This could be it!! You’re running behind schedule but whatever.

September 30th — you get that sweet cash from the marketer. You pay September’s OPEX, salaries, rent, interest, and well, fuck. It’s only $152,000 at the end of the day. Shit. $1.453m in the bank is cutting it tight. You have to pay the vendors for well three, but you’re alive.

Anyways, without rambling on, the story ends like this.

Sequential type curve financing will kill you.

They end up either diluting shareholders so hard that no value was created, or, going bankrupt.

Either way, not desirable for any party.

This is a tough, tough business.