As mentioned in a conversation with Gotgame yesterday, now is a perfect opportunity to ask questions. Here is one of the 2 I asked and the response.
#3 Posted : Friday, March 13, 2015 8:21:53 AM
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Xun Pres
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Thank you SPICEMAN for your post and questions in Post #2 above.
We have replicated your post below:
Good afternoon Jerry. On Feb 25th you made this comment "Whether or not successful with these early ventures, the cost to the Company was minimal and it gained invaluable experience, and ultimately settle on a set of procedures and affiliations that would lead to success."
From this first JV deal have you developed any safeguards or procedures to follow for the JV deals of the future? Thanks Spiceman
Question #1: From this first JV deal have you developed any safeguards or procedures to follow for the JV deals of the future?
Response #1: Yes, we have developed safeguards, checkpoints and policies to mitigate risk to the Company, its shareholders and it's financiers.
The Company management team spent countless hours working with Idria Energy, Inc. et al (IEI) from reviewing the historical documents pre JV002 to SPA2 review, editing and compilation of the various contracts. Once SPA2 was agreed to and executed by the counterparties, the Company was involved in working with IEl to administer the SPA2 and the Charter Party Agreement.
One of the most important takeaway that we were blessed with is that the failure by the Filkas to perform saved the Joint Venture millions of dollars in losses as a result of the falling market price of crude oil and the correlating market price for aviation jet fuel. SPA2 was based on a fixed gross price of US$84.00 per barrel for a total contract cost of US$5,124,000,000. SPA2 did not have an "evergreen clause" or "stop gap" clause that would have mitigated losses from market price declines. At the time, aviation jet fuel was stable in pricing for the last 3 years and the market collapse for crude oil was not expected. As you can you in the chart below, the last time aviation jet fuel was below US$84 was in fall of 2010.
Our take away from this blessing in disguise is that all fixed rate SPA's must have an evergreen clause (trigger and mechanics to renegotiate the purchase price) or a stop gap price should the market fall below the stop gap price.
The alternative to an evergreen clause or stop gap pricing is to negotiate the SPA on a indexed pricing system. Aviation Jet Fuel is predominately purchased by the Majors on a discount or premium to an Index such as Platts or Argus indices. i.e. Rotterdam falls under the North West Europe (NWE) Platts index or Argus European Products (AEP) index. These reports are published daily based on the prior market days activities. By negotiating a purchase price based on an index, the purchase cost would float to the market price swings and correspondingly, when an Aviation Jet Fuel SPA is entered into with a Major, the sales price is indexed. The gross profit (loss) would be the delta between the indexed purchase price and the indexed selling price. Our obvious goal is to negotiate a larger discount on the price of the aviation jet fuel and a lesser discount or a premium to the index price on the sales side, hence a gross profit. Market conditions at the time of negotiations will affect the establishment of the purchase price and then when the product is sold, the discount or premium negotiated with the Major (exit buyer).
Other takeaways learnt from the JV002 experience include but not limited to (some takeaways are competitive in nature and cannot be disclosed):
• Exhaustive due diligence on the supplier.
• Negotiate out any front end fees, usually red flags for scams.
• Immediate due diligence on all shipping documents including confirmations with the vessel owner and operator.
• Less reliance on the broker chain.
The physical commodity trade business is a large and lucrative industry and success in this market will depend greatly on establishing relationships with reputable suppliers and exit buyers. There are a lot of scammers (fraud) in the industry, some of which are very sophisticated, as the case is, allegedly with FILKAS. There are no assurances that the Company, even after learning from JV002 and others over the past several months, that we may not be scammed. Our goal, based on our takeaways, is to mitigate any possible losses from potential scams or fraud. As a professional forensic auditor, I have found many fraudulent transactions, over my career, occurring in seasoned, well developed companies purported by their own employees, contractors and suppliers. A company can only mitigate its exposure by establishing proper internal controls, policies and procedures.
DISCLAIMER: SUBJECT TO SAFE HARBOR CLAUSE.
We thank you for your interest, support and faith in the Company.
Respectfully,
Xun Energy, Inc.
Jerry G. Mikolajczyk
President and CEO
Safe Harbor
#3 Posted : Friday, March 13, 2015 8:21:53 AM
Retweet
Thank
Quote
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Xun Pres
Rank: Administration
Groups: Administrators
Joined: 12/14/2012
Posts: 192
United States
Location: Florida
Thanks: 200 times
Was thanked: 293 time(s) in 104 post(s)
Thank you SPICEMAN for your post and questions in Post #2 above.
We have replicated your post below:
Good afternoon Jerry. On Feb 25th you made this comment "Whether or not successful with these early ventures, the cost to the Company was minimal and it gained invaluable experience, and ultimately settle on a set of procedures and affiliations that would lead to success."
From this first JV deal have you developed any safeguards or procedures to follow for the JV deals of the future? Thanks Spiceman
Question #1: From this first JV deal have you developed any safeguards or procedures to follow for the JV deals of the future?
Response #1: Yes, we have developed safeguards, checkpoints and policies to mitigate risk to the Company, its shareholders and it's financiers.
The Company management team spent countless hours working with Idria Energy, Inc. et al (IEI) from reviewing the historical documents pre JV002 to SPA2 review, editing and compilation of the various contracts. Once SPA2 was agreed to and executed by the counterparties, the Company was involved in working with IEl to administer the SPA2 and the Charter Party Agreement.
One of the most important takeaway that we were blessed with is that the failure by the Filkas to perform saved the Joint Venture millions of dollars in losses as a result of the falling market price of crude oil and the correlating market price for aviation jet fuel. SPA2 was based on a fixed gross price of US$84.00 per barrel for a total contract cost of US$5,124,000,000. SPA2 did not have an "evergreen clause" or "stop gap" clause that would have mitigated losses from market price declines. At the time, aviation jet fuel was stable in pricing for the last 3 years and the market collapse for crude oil was not expected. As you can you in the chart below, the last time aviation jet fuel was below US$84 was in fall of 2010.
Our take away from this blessing in disguise is that all fixed rate SPA's must have an evergreen clause (trigger and mechanics to renegotiate the purchase price) or a stop gap price should the market fall below the stop gap price.
The alternative to an evergreen clause or stop gap pricing is to negotiate the SPA on a indexed pricing system. Aviation Jet Fuel is predominately purchased by the Majors on a discount or premium to an Index such as Platts or Argus indices. i.e. Rotterdam falls under the North West Europe (NWE) Platts index or Argus European Products (AEP) index. These reports are published daily based on the prior market days activities. By negotiating a purchase price based on an index, the purchase cost would float to the market price swings and correspondingly, when an Aviation Jet Fuel SPA is entered into with a Major, the sales price is indexed. The gross profit (loss) would be the delta between the indexed purchase price and the indexed selling price. Our obvious goal is to negotiate a larger discount on the price of the aviation jet fuel and a lesser discount or a premium to the index price on the sales side, hence a gross profit. Market conditions at the time of negotiations will affect the establishment of the purchase price and then when the product is sold, the discount or premium negotiated with the Major (exit buyer).
Other takeaways learnt from the JV002 experience include but not limited to (some takeaways are competitive in nature and cannot be disclosed):
• Exhaustive due diligence on the supplier.
• Negotiate out any front end fees, usually red flags for scams.
• Immediate due diligence on all shipping documents including confirmations with the vessel owner and operator.
• Less reliance on the broker chain.
The physical commodity trade business is a large and lucrative industry and success in this market will depend greatly on establishing relationships with reputable suppliers and exit buyers. There are a lot of scammers (fraud) in the industry, some of which are very sophisticated, as the case is, allegedly with FILKAS. There are no assurances that the Company, even after learning from JV002 and others over the past several months, that we may not be scammed. Our goal, based on our takeaways, is to mitigate any possible losses from potential scams or fraud. As a professional forensic auditor, I have found many fraudulent transactions, over my career, occurring in seasoned, well developed companies purported by their own employees, contractors and suppliers. A company can only mitigate its exposure by establishing proper internal controls, policies and procedures.
DISCLAIMER: SUBJECT TO SAFE HARBOR CLAUSE.
We thank you for your interest, support and faith in the Company.
Respectfully,
Xun Energy, Inc.
Jerry G. Mikolajczyk
President and CEO
Safe Harbor
