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With a market cap of £7.79 million as of 31 August 2012, Resaca Exploitation (LSE:RSOX) is a small company, but it has got big problems. A drop in its share price today of 43.84% has reduced its value to £4.25 million. Shares closed yesterday at 36.50, but plunged to 20.50 by midday today.
Small Company with Big Dreams
Resaca is an independent oil and gas exploitation company based in Houston, Texas, with operations primarily in the Permian Basin in West Texas and Southeast New Mexico. It differs from traditional oil & gas production companies in that it does not get involved in exploration. Rather, it exploits “known, mature, low-risk to moderate-risk oil and gas reserves” in hopes of producing secondary and tertiary recoveries. Resaca‘s 179 producing wells and 58 injection wells are located within a 100,000 square mile basin that has produced over 21 billion barrels of oil since 1921. Secondary recovery is accomplished by reactivating wells, then generating oil by water-flooding and infill drilling. Tertiary recovery is facilitated by CO2 flooding.
The Resaca strategy is to expand into other areas with similar opportunities for exploitation, including South America and Central Canada, utilizing existing infrastructure. By eliminating the significant front-loaded expenses of exploration, the company hopes to access previously proven and productive sites where significant oil deposits, at least for a small company, could be retrieved profitably.
Small Company with Big Problems
The huge drop in Resaca’s share price followed a corporate update this morning in which the company announced that it has some serious financial problems. Resaca is no longer able to drawn down funds from its senior credit facility as a result of being in noncompliance with the debt to EBITDA ratio and EBITDA to interest ratio covenants of their subordinated credit facility. Consequently the company is now noncompliant with the asset-to-liability ration of both the senior and subordinate facilities. The failure to stay within the parameters of the covenants has triggered interest rate increases on the subordinate facility from 2% to 14% and on the senior facility from 3.5% to 7.5%.
In February 2012 Resaca had drawn down the entire remaining balance of its senior facility, leaving only its operating cash flow to fund capital projects. The strategy to relieve the pressure of the situation includes shifting the company’s primary focus to selected sites that are best-suited to water-flooding, thereby increasing their production and increasing cash flow from operations. Resaca believes that it can increase production at those sites by a minimum of 40%. The company is also giving serious consideration to divesting a number of its assets to reduce its indebtedness and return to compliance with its credit facilities. The selection of those assets is still under consideration.
Small Company with Big Hopes
CEO J.P. Bryan expressed both his concern and his determination saying, “While we are disappointed that we need to reduce our production goals for the year ending 30 June 2013 and continue to be in non-compliance on our credit facilities, we continue to believe in the value of our long-lived, oil weighted properties. We are considering all possible alternatives to address the non-compliance with our credit facility covenants, with the ultimate aim of easing our capital constraints and therefore being able to increase production rates.”
Unfortunately for Resaca, it’s probably going to take quite some time to regain shareholder confidence.
