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Monday, 11/21/2016 4:13:46 PM

Monday, November 21, 2016 4:13:46 PM

Post# of 17737
LLEX +.70 to $3.40

Lilus Energy is a tiny Permian Basin junior. As most know, the Permian is one of the few oil basins in the US that can successfully support oil production at current oil prices. Eagle Ford and Bakken wells are unlikely to pay back their drilling costs at $40 oil plus a return on capital. That's why drilling activity has fallen off the map in those two formerly red hot areas. There are exceptions in the absolute heart of these areas but most companies have too broad an exposure to the bigger areas to allow overall company profitability.

Of course, the drop in oil prices has also create much more competition in the drilling and completion industries so exploration companies are able to drill quicker and for a lot less money. They are using more sand to open more fractures in the fields. Most companies are reporting big drops in costs.

IF oil moves up, these lower costs are going to allow many to profit BUT lower for longer means that many are still headed for bankruptcy.

Another big detriment for most oil companies is debt. When oil was $100/bbl, most exploration companies loaded up on what looked like cheap debt. Now they are struggling to service debt and BK is a maturity or two away.

So what makes the Permian different? Multiple layers of profitable pay zones means that each acre of land has many different layers that can be drilled. They won't be drilled simultaneously but rather the driller can pick the very best zone to drill first in these low price times.

Later, when the well approaches stripper status, the owner has many options to drill other zones.

So little Lilus was started fairly recently with the goal of buying undervalued pockets of land. Smaller parcels take too much work for the big guys to assemble into workable acreage. With horizontals of 6,000+feet standard, you need continuous acreage and rights to as many of the zones as possible. Their first big purchase was to buy/merge with a company called Brushy Resources. They owed huge amounts to a bank and were on the verge of bankruptcy. Lilus negotiated with the Bank, provided interim loans to Brushy and successfully bought about 3500 acres net in the prime Permian counties on the Texas/New Mexico border. Since the first purchase, they have purchased an additional 1500+ net acres adjacent to the first purchase. The big attraction to this approach? Lilus just closed on the purchases this year at $4,000 to 5,000 per acre. Permian land has sold for more than $40,000/acre and will likely go much higher as it remains one of the only games in town. As drillers are able to complete multiple zones on the same acreage, the price per acre could easily exceed $100,000 per acre.

5,000 acres doesn't sound like much for a junior valued well over $200+million. But the company says that 5,000 net acres contains over 500 drilling sites. That's a lifetime of drilling for a junior.

Another angle for Lilus is that they bought existing production on the land. There are vertical wells that already have been producing for quite a while. Lilus is targeting these well bores for the first 12 wells. They don't have to drill vertically, it's already been done. They just have to drill the horizontal portion of the well to access prime zones and frack them with the latest techniques to generate state of the art Permian wells. Using existing vertical bores will save 1 to 2 million per well. So Lilus doesn't need as much capital as other startups.

So what's the catch? Well, there are no existing horizontals on the Lilus properties. So they don't have proof that their land will produce using the latest horizontal techniques although nearby land has produced good results.

Lilus is currently drilling the horizontal sections of two wells. They expect results before 12/31/16. If successful(>1,000boepd each), Lilus should soar in value because of the 500+ sites that could potentially come from their small acreage position.

Due to the merger with Brushy and the financing of this startup, share count is fairly messy. Outstanding shares is less than 20million shares but convertibles, options and warrants get the FD number closer to 60million shares.

The warrants are actually a positive because when exercised, they will help finance more drilling or land acquisition.

Lilus recently announced up to a $50 million debt facility that should take care of near term liquidity/drilling needs.

http://investors.lilisenergy.com/phoenix.zhtml?c=225413&p=irol-newsArticle&ID=2206944


So today the stock popped back up. There were several huge volume days last week and the stock dipped intraday to $2.10. This looked like early investors selling to convert their warrants. I was able to buy a few shares at 2.57 this morning before it popped to the current 3.40.

I think there will be some more profit taking before year end but if they announce good results from the two horizontals, it could take off for $5 to 6. I have a small position because there are a lot of things that have to happen for Lilus to really take off.


Near Term Catalysts

1. Results from two horizontal wells
2. Production guided for 3,000boepd by year end from current 800boepd
3. Good wells results will likely result in the company uplisting to nasdaq early in 2017
4. Uplisting should result in analyst coverage. There is currently none.
5. More acreage add ons. Here is the last PR
http://finance.yahoo.com/news/lilis-energy-increases-delaware-footprint-131500916.html


Positives

1. Potentially profitable from Permian Basin acreage, need more production to prove up acreage. Can make money at current prices
2. All existing Permian producers have soared in 2016. Callon, CPE and Resolute, REN are examples.
3. Mgmt has decent credentials, with Ron Ormand, Executive Chairman having been a founder of Magnum Hunter Resources, which soared from nothing to 3.2 billion market cap before crashing due to high debt and low prices. Ormand left before it collapsed.

http://www.lilisenergy.com/

I don't recommend rushing out and buying LLEX at current prices but it deserves being on a watch list to see if they can hit their objectives before year end. Again, there could be selling before year end by warrant holders who want to exercise and just profit takers. So there might be more opportunities in the $2.55 area that I was able to buy last week and today. It's a small position because it expensive and speculative but 5,000 acres X $100K = $500 million market cap vs current $200+million.

Please post stock symbols first in all your posts. If it's a foreign stock, please list the US pk equivalent symbol.

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