Far East Energy Corp. (PINK:FEEC) Soars High on Fresh Capital Injection

The shares of Far East Energy Corp. (PINK:FEEC) soared 50% after the company announced to have secured capital in excess of $80 million yesterday aimed at an extensive drilling program. As positive as the news might sound at first, we deemed it necessary to look at the big picture to see how reasonable an investment in FEEC actually is.

While attracting millions of dollars is always a feat when it comes to penny stocks, it does not necessarily mean that the beneficiary has negotiated favourable terms to secure the financing. In FEEC‘s case, the company got the money using a two-pronged approach, i.e selling senior secured notes for a total of $60 million, as well as receiving $21 million as per the credit facility agreement signed by and between Far East Energy (Bermuda), Ltd., a wholly-owned FEEC subsidiary, on the other hand, and Standard Chartered Bank, on the other.

The problem with the notes lies in the interest they will bear. This interest amounts to 13% per annum to be paid in arrears at six-month intervals over three years. Put in numbers, this means six semi-annual payments of approx. $3.9 million each. FEEC‘s average interest expenses for the last four quarters on record go somewhere in the neighbourhood of $1 million. Has the company been able to cover them? Considering that FEEC has incurred an average net quarterly loss of $7 million for the last 12 months, apparently not. And with the new private placement, the company’s managers have just added $1.95 million to its interest expenses for the next six quarters.

As far as FEEC‘s other financial indicators are concerned, they have shown definite signs of deterioration from Dec. 31, 2011 to Sep. 30, 2012, namely:

• cash reserves: $3.6 million, down 85% from Q4 2011;
• current assets: $6 million as of Sep. 30, 2012 vs. $25 million available in Q4 2011;
• working capital gap: $36 million, up 112% from the quarter ended Dec. 31, 2011;
• average quarterly revenue: $0.36 million.

On a positive note, FEEC‘s proven methane reserves in the Chinese Shouyang Coalbed Methane block have been appraised at some $70 million. The company also claims to have locked an offtake pipeline agreement. Now, all it needs to do is carry out a major drilling program and succeed in extracting the methane adsorbed into the solid matrix of the coal. Achieving this goal involves a safety risk for the people working there. Plus, FEEC is currently acting as a foreign contractor on Chinese turf, which means that even the slightest deterioration of its relations with local partners could have quite adverse an impact on the whole project.