While we are all waiting for results from the Leonard #2 well, I wanted to take a moment to address investor questions regarding our plans for wholesale marketing of diesel fuel and other distillates. I understand that the Company has had significant aspirations in this area, so our plans are naturally of interest to our shareholders.
First, we need to understand a few things about wholesale fuel marketing. It is much more complicated than simply selling fuel through the terminal. The basic business (for a company like Adino) consists of purchasing fuel in bulk that is delivered via pipeline connection to the terminal and stored there for sale to fuel haulers and station owners. This can be an excellent business - buy a commodity in bulk at a discount and sell very large quantities at a small per-gallon margin. As long as you're able to consistently turn your inventory, returns on capital can be more than satisfactory.
However, as the old saying goes, there is no free lunch. The real risk in the business is that you have to purchase several days or weeks of inventory at once. Diesel fuel is priced daily (sometimes several times per day) so if you're on the wrong side of a price trend (declining prices) you can take some pretty big hits in short order. Over time these should balance out, but from month to month or quarter to quarter it can be very volatile.
So where does that leave our Company? At this point, we have a solid cash producing asset in the fuel terminal. Both revenues and cash flow are stable - a big plus for an early stage oil & gas exploration and production company. We are deploying this cash flow to build value in the E&P business and expect to continue to do so.
It's important to understand that we're always looking for ways to optimize our assets to maximize shareholder value. We could potentially get into fuel marketing through a joint venture or some other structure in which we would partner with an experienced commodity risk manager. We could also monetize the asset. We could continue to redeploy the monthly cash flow into the E&P business. Or we could take some other route that either hasn't yet presented itself, or that we aren't yet ready to discuss. But whatever we do, it will be designed to create the greatest possible value for our shareholders.
That's all for now. Look for press releases regarding the Leonard #2 well this week. It's going a lot faster than the first well - a pace that we intend to keep up!
Best,
-Shannon
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