XTOG is moving towards profitability with giant steps…..here is what I see.
As noted previously XTOG had the opportunity to secure a $20 mil credit faculty. On sheer audacity Xtreme turned it down to explore other avenues that would make their company profitable without drowning in debt. Their solution; just simply do business. They have: traded, sold, negotiated joint ventures and even loaned out Willie Mc A the 3. As a result, XTOG could have $1.5mil cash on the balance sheet & millions in revenue by the end of 2013. All without incurring one additional development cost.
Let’s revisit the Torchlight deal once again....
The joint venture with Torchlight splits 50% working interest in the Smokey Hills property. Torchlight has agreed to assume all responsibility and expenses to complete a first well and develop a second well. If the first well produces more than 300 barrels a day, XTOG could sell the remaining 50% ownership to Torchlight for $4 mil in TRCH stock. Below 300, Torchlight and Xtreme will split the revenue 50/50.
My first thought, ‘Owning 4mil in TRCH stock and reaping its’ stock rise=$$$” …Pondering further, I believe 300 barrels a day could be an optimum number and maybe difficult to reach…. a rare situation where underachieving could be even better.
Let’s assume 300 barrels a day is the dream production, a dismal showing would be 100 barrels. So, as per my usual, let’s take the middle number of 200 as a reasonable achievement. If both wells produced 200 barrels a day. It would be production of 400 bpd. XTOG acquired 17.79% lease hold interest in Smokey Hills, therefore, they would reap 8.9% revenue. Using the present oil price $94.33 x 400 barrels x 8.9%= $3,410 per day in revenue or $1.225 mil per year
The second part of the Torchlight deal was the Lenhart property. The optimum number for Lenhart production was 50 barrels per day for XTOG to sell their remaining 50% for $1mil in TRCH stock. Therefore, let’s use only 25 barrels per day as a reasonable achievement. XTOG 50% is 17.5 barrels x $94.33= $1,650.77 per day or $603k per year with all expenses covered by Torchlight.
Even in the failure to reach optimum numbers, Xtreme could gross $1.828 mil a year in revenue, (Don’t forget the $1.2mil cash from sale on the balance sheet.)
About the Heritage deal….
Xtreme has entered into a second joint venture with Heritage, for $325k cash and the obligation to drill and develop the West Thrifty Unit. XTOG will relinquish 1/8 of the revenues. Referencing my previous post I calculated a middle number of 79.5 barrels per day. The deal would leave Xtreme with 87.5% or 69.6 barrels per day of development free revenue. Using the present oil price of $94.33 x 69.6 barrels = $6,565 per day or 2.396 mil per year.
The property connected to the West Thrifty Unit is Quinta. The cost to reopen this well is nominal, Xtreme preformed some development work in 2008 achieving 30 barrels a day, however they feel the initial development plan overstimulated the field and did not maximize the prospects’ potential. If 30 barrels a day is the dismal number let’s consider it achievable and simply use the present oil price of $94.33 x 30 barrels =$2829.90 per day or $1.033 mil per year.
To put all of this into perspective. XTOG could show up on a stock screen as having a sales increase of 7,678 %
From here you can use any P/E ratio you believe to be fair. At one time I thought 16x to be the norm, upon looking further big oil companies are all over the place… (NXY is at 37.6x , HSKYF is at 15.2x, UDRL is at 151.5x!!!) So, pick a number.
About our new shares…..
Admittedly, this dilution is gargantuan pill to swallow. Unfortunately, the climb upward includes this large and painful step. The silver lining shines through in one place, between issuing common and preferred shares the Q2 liability column will be reduced by over $4 million plus a significant monthly reduction in interest expense. It makes for a sweet quick ratio. One also has to remember this management are the XTOG founders. They were the largest shares holders until their 2013 decision to trade debt for equity. This diluted their holdings as well, yet they made this commitment to make the company go. Plus, creditors agreeing to acquire shares instead of receiving cash shows confidence in the company.
When I first found XTOG I saw it as an oversold company trading at a fraction of its asset value. Today I just consider having bought into this management as the most fortunate accident. All I have read gives me a great deal of respect. Having the brawn to drastically reduce debt this way took cojones. The SEC filings are some of the most candid I have come across. To have brokered the joint ventures with Torchlight and Heritage took negotiating skills. I can’t help but feel that Willie Mc A the 3 and his directors are just simply liked by their peers. For a nano company in the oil world that is something to be said.
2013 is definitely the turnaround year. XTOG earnings will have 6 figures in cash and 6 figures in revenue, it just may meet the September price goal and it will all be to the credit of managements’ ability to behave like businessmen.
Disclosure: Still holding 1 million shares and sleeping like a baby. It is my intention to buy another million or more if irrational trading causes this stock to reach my price. Patience is my virtue. I still believe XTOG will be at a 2011 price in the near future…. not Q1 2011 like I once thought but, a number far higher than 0.007.
GLTA
