Monday, March 8, 2010

Cubic Energy Back Out of the Ditch

Kudos to Cubic Energy. The company announced today that it is back in compliance with the AMEX stock exchange.  For the past seven months, the company has fought being de-listed from the exchange, which it only recently joined after trading as an over-the-counter bulletin board stock. To salvage its listing, the company renegotiated its debt agreement with Wells Fargo and it acquired $30.9 million in drilling credits from Tauren Exploration.  Not a lot of companies that fight de-listing win, so it's a good day for Cubic.

(I never quite understood the drilling credits transaction, which occurred back in November 2009.  The press release was clearly written by lawyers who had no interest in informing the public of the details behind the affiliated transaction, as both Cubic and Tauren are controlled by Calvin Wallen, III.)

Cubic got in trouble this summer when Wells Fargo reduced its fully drawn $20 million borrowing base to $7.5 million back when natural gas prices were in the $2 range.  The new debt agreement actually increases the company's borrowing base to $25 million.  The rate stayed the same (prime +2) but the company had to issue Wells five million warrants to purchase Cubic stock at $1 (it closed today at $1.32).  I'm sure there were also lots of banking fees involved to make it even more painful for Cubic.

Unfortunately, being an independent E&P company almost invariably makes you a borrower in this business environment.  Bad economic times coupled with a poor commodity price environment make you a victim-in-waiting unless you have a very strong balance sheet.  With the incredible amounts of spending on the Haynesville Shale over the past couple of years, most of the active producers had to fund these expanded operations by selling equity and taking on new debt.  The trick now for these companies is to generate positive cash flow through operations rather than borrowing.  With the rapidly sinking price of natural gas, it gets harder every day.

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