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Summary

  • Significant selling pressure over next two weeks; great buying opportunity.
  • Production up 20% YTD and 80% TTM.
  • Anticipate $15-20mm revolving credit facility in place by AGM in July.

(Editor's Note: Investors should be mindful of the risks of transacting in illiquid securities such as ATXDY. AusTex Oil's listing in Australia as AOK.AX offers stronger liquidity.)

The next two weeks should see plenty of volume in ATXDY and ASX:AOK as a number of slightly in-the-money options expire and convertible notes mature. It appears that most conversions and exercises to date have immediately sold into the market. So far there have been buyers at A$0.17 maintaining a floor on the stock. However with an estimated 15mm+ June 7 A$0.15 options still unexercised and ~$5mm June 13 A$0.15 notes still outstanding (see table) there will likely be some significant selling pressure over the next two weeks. This could result in short term weakness in price creating a good buying opportunity.

In the first quarter of the year nearly 7 million options were exercised at A$0.15 generating ~$1mm in options premiums. In addition $2.425mm notes have been converted leaving $5.075mm still outstanding. This has freed up nearly $3.5mm for the company to spend on field development. The balance sheet remains robust after the December 2013 preferred issuance that raised $17.5mm.

With the AGM coming up at the end of July I anticipate the company will issue an updated reserve report in order to secure a traditional revolving credit facility shortly after the convertible notes mature on June 13. According to the December 31 report the company had ~$30mm in PDP reserves. That alone should support a $15-20mm loan at sub 5% coupon alleviating the need to revisit the equity well as they have done historically.

With all this noise management has done a great job ensuring the company executes at the field level. According to the most recent operational update on May 21, production during the month of April averaged 1,133 boe/day. This is up 20% for the year and up ~80% since April 2013. Production should increase rapidly over the coming quarter with over 10 wells in various stages of completion and two rigs operating full time drilling another 6-7 wells per month. This compares to a total of 10 new wells drilled in the entire first quarter of 2014. Economics will be further enhanced when the company completes its gas sales pipeline which will deliver gas and NGLs to higher paying sales points.

The company is at the final stages of transition after years of expensive equity, convertible debt and preferred financings. Over the next quarter the balance sheet will certainly look a lot simpler as options are either exercised or expire and notes converted or mature. Going forward the company can rely on traditional bank debt and cash flow to fund development. Infrastructure improvements will make already exceptional well economics even stronger. Don't be surprised to see the stock move closer to the company's 1P valuation of $217mm over the same period.

AusTex Oil Limited Options Table

Grant Date

Number Issued

Expiry Date

Exercise Price

June 7, 2012

20,490,197

June 7, 2014

A$0.15

Aug 1, 2011

27,272,726

July 29, 2014

A$0.15

Aug 22, 2012

182,000

Aug 15, 2014

A$0.15

Aug 22, 2012

10,000,000

Aug 22, 2014

A$0.15

Sept 1, 2011

12,500,000

Aug 31, 2014

A$0.15

Mar 12, 2012

10,000,000

Mar 12, 2015

A$0.20

June 13, 2012

25,257,627

June 13, 2015

A$0.20

Mar 6, 2013

10,000,000

Mar 6, 2016

A$0.25

Oct 24, 2012

20,000,000

Oct 24, 2017

A$0.15

Total

135,702,550

Total Remaining

131,252,550*

* According to company filing 5/27/14

** $2,425,000 notes have been converted with another $5,075,000 available to convert at A$0.15 anytime prior to maturity on Friday, June 13.

Source: Austex Can't Stop, Won't Stop