When we last discussed Viking Energy (VKIN) in this space in August 2018, we commented that the changes to the management team and board of directors signaled that a potential uplist was on the drawing board. Additionally, we were encouraged with Viking’s filing in September regarding its agreement to purchase additional producing assets in Texas and Louisiana.
In September 2018, Viking did indeed file its application to list its common shares on the Nasdaq Capital Market ("Nasdaq"), and in November 2018, the company closed on a $15 million private placement of partially convertible notes.
$90 million acquisition of Texas and Louisiana oil and gas assets
Viking kicked off 2019 by announcing the closing of the acquisition of oil and gas assets in Texas and Louisiana that increase the company’s oil and gas reserves by approx. 10.5 million barrels of oil equivalents (BOEs).
The acquisition gives Viking Energy the majority working interest in 58 conventional producing oil and gas wells primarily in Orange and Jefferson Counties in Texas and in Calcasieu Parish in Louisiana, in addition to 35 salt water disposal wells. Viking noted that the acquired assets produce hydrocarbons from known reservoirs and sands in the on-shore Gulf Coast region, including the Hackberry, Yegua, Wilcox, Amphistegina and Robira. The current production, net to Viking’s subsidiary, from these assets is about 2,469 barrels of oil equivalent per day (BOEPD).
The base purchase price for the assets was about $90 million, being the present value of the Proved Developed Producing Reserves, using a discount rate of 18% (PV18), which was determined by Netherland, Sewell & Associates, an independent engineering firm. The acquisition was funded in large part by a term loan of about $63.6 million and common stock warrants.
The acquisition is large, from both a monetary and production standpoint, relative to the size of our company immediately prior to closing, but it is merely a small step within a more comprehensive long-term acquisition and growth strategy. We are committed to operating these assets, along with our other assets, as efficiently as possible, and to identifying and evaluating additional growth opportunities across all company divisions.
- James Doris, President & CEO, Viking Energy
Historical Revenue from Purchased Assets
On February 28, 2019, Viking Energy filed a Form 8-K/A with respect to this acquisition, which provided an audited, two-year history of the revenues and expenses associated with the purchased assets. In 2018, gross revenues and net revenues were $41,696,140 and $31,276,594, respectively. These revenue levels confirm the transformational nature of the acquisition for the company, provided production levels from the assets can be maintained.
On March 13, 2019, Viking Energy filed a Form 8-K with respect to its proved oil and gas reserves as of December 31, 2018. The total proved reserves were 10,731,215 BBL and 34,758 MMCF, at a collective value of $288,805,990, based on the pricing and other assumptions outlined in the summaries included as exhibits to the filing, representing an increase of more than 6 times the reserve levels from the prior year.
Investment issues to consider
Viking Energy stock peaked at $0.42 in the days following the announcement of the Nasdaq application last September, in the two most actively traded days for the stock since May 2018. The shares have since consolidated to pre-announcement levels, closing at $0.175 per share on March 13, 2019, giving the company an equity market capitalization of just $15 million. Given that the filings mentioned above regarding the revenues from the recently acquired assets and the company’s proved reserves as of December 31, 2018, are relatively recent, it is possible that Viking’s demonstrable progress and potential have not yet resonated with the market.
We note that the potential uplisting of Viking’s common stock to Nasdaq will depend, among other requirements, on the company’s ability to meet Nasdaq’s minimum share price, the achievement of which may hinge on a reverse split of the common stock.
Investors should of course keep an eye on oil prices, which we think will continue their modest recovery from the lows of late 2018, spurred by an economy that continues to show positive signs of growth. There is downside risk in oil, of course, from several global factors, not least of which is the specter of a full US-China trade war. Our bet here is that, less than 20 months away from the critical 2020 election, the US will find a way to avoid such a calamity. Additionally, we think Viking’s susceptibility to a swoon in the oil market may be mitigated somewhat by the historically strong demand for oil and gas in the regions where the recently acquired properties are located. The company has indicated that this demand has resulted in a realized product price consistently above the West Texas Intermediate (WTI) benchmark.
Viking’s two-pronged approach of (i) acquiring existing undervalued producing properties that generate immediate cash flow and (ii) establishing long-term sustainability through calculated and responsible drilling programs is rare to see in a company at its stage of development. The typical speculative exploration programs that one might expect are nowhere to be found. Rather, the company is focused on properties with both current production and untapped reserves that carry upside potential. The evidence suggests that Viking Energy is a small, nimble company with the heart of a mature, responsible one, and that’s the kind of company we’re happy to follow.
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