explanation of the exchange ratio
Today, I received an email from Mr. Tang, who explains the deal in an unexpectedly detailed manner:
Dear Mr. XXX,
Thank you for your interest in the affairs of the Corporation and the
Plan of Arrangement between ROL and Action.
To calculate the NAV of both companies, we have engaged two independent
investment bankers to provide us with their opinions.
The NAV of both companies is generally based on 1) Reserve valuations,
normally at 10% PT @Dec 31, 2006, adjusted for revisions after the
reporting period (Upward or Downward), 2) Land Base , 3) Valuation of
tax Pools, 4) In-the-money Options and Warrant Proceeds, 5) Debt, 6)
Others minor adjustments (such value seismic data base, etc), and
perhaps 7) Other intangible considerations (no real actual value
assignable).
In Q1 and Q2, Action have added substantial amount of oil production
volume and reserves values which was not included in the Dec 31, 2006
reporting period and therefore creating an upward adjustment in reserve
values. The drilling success has been reported but the valuation is not
included in the Dec 2006 report or in the quarterly report.
On the other hand, based on production history and unexpectedly
faster/actual natural decline, subsequent to the ROL's reporting period,
the reserve recovery factors used in some wells at Teepee Creek needed
to be adjusted downward, unfortunately, causing performance impairments
and decline in reserve values of ROL.
We have used the same pricings for both reserves and land evaluations,
and used the same methodology and approach to due with tax pools and
I-t-m options and warrants (if any).
All these combined, led to the proposed exchange ratios for both classes
of Common Share.
Other intangible considerations;
1) Action has a substantial inventory of high impact exploration
prospects, each if successful, could potentially double the production
of Action. Action does not include any production and cash flow from
exploration drillings in our forecasting. We are quite conservative in
our approach in managing cash flow.
2) Action has a substantial inventory of low-risk, repeatable
development drilling locations both in oil and natural gas to provide
steady growth for shareholders like you and me. We have drilled 28
short-leg horizontal development oil wells and 8 development gas wells
thus far from our inventory of 100s. The decision to drill more oil than
gas is subject to economics as you would expect.
3) Management and director have substantial amount of our own money in
the company and majority of our shares are also subject to escrow for a
number of years. Our interests are aligned with shareholders. We are not
just a "for hire" management team.
4) Rolling Thunder, based on their public release of production
guidance, and actual production in the last 6 months, has used a more
optimistic forecast, which is currently behind schedule. I am not
concluding or predicting that they will not meet their annual average
and/or exit production rate, but it will be a real challenge for ROL in
the next 6 months to meet their targets. Just my personal thought.
Action initiated and approached ROL in January of 2007 for a potential
Arrangement. At that time, ROL has forecasted ~ 1500 boepd in their
guidance. We felt, based on our knowledge and understanding of the play,
and experience, that the production guidance was a bit strong and has a
real risk of decline back to a lower level (~1000 beopd). We made a
decision to back off from the deal and risking of losing to our
competitors.
Mr. XXX, judging the current market conditions, I believe it is
advantageous to have a company with a strong footing and a critical mass
of assets and production to march forward. I believe it is beneficial to
combine both entities.
If you have further questions, please email or call me @ 403-264-1102
(direct line).
Yours Sincerely,
Roger Tang
Chairman and CEO
Action Energy Inc.
