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+--- Thread: Price per mcfe valuation analysis (/showthread.php?tid=158)
- sltibbs - 12-28-2011
It appears the arguments about the quality of Elk/Antelope (E/A) have faded away. Political risk still exist that could further impede E/A's development, but that too seems to be fading. Of course, there is execution risk with any large project, but that is nothing new.
So, to see if this risk is justified one needs to look at the potential reward. Since cash flows are still 3-4 years away let's value IOC based on similar transactions. Note not all transactions are the same, but we can likely agree that the lower the extraction cost the higher the profit margin and the higher the profit margin the more one would be willing to pay for the asset. Of course, extraction cost is a function of many variables, but here are a few that are important. Size of the asset: E/A is a huge find and therefore about to supply multiple trains which greatly enhances the economics. Flow rate: E/A has had world record flow rates with pressures that almost immediately return to full pressure, more drilling is required, but it should be obvious that the total required cost per mcfe to be extract is lower than the majority of reservoirs in the world, especially coal seam gas projects out of Australia. Pipeline distance and terrain: Unlike XOM/OSH pipeline there is no subsea section no substantial changes in altitude and IOC’s is a much shorter distance through areas with lower population and its Gulf location will support a poorer region of PNG . Processing costs: Using modular and FLNG production have the benefit of being built in a controlled area and not having to compete as much for skilled labor in PNG. Location: On the doorstep of the largest LNG users in the world. Important consideration given the cost to transport LNG is around 150,000/day and rising (see http://www.businessweek.com/news/2011-12-19/lng-shipping-rates-climb-to-a-record-on-scarcity-of-vessels.html). Not to mention it is a long way from the often volatile Middle East All positives that increases the price for IOC assets. Potential negative is that the potential buyers know that IOC needs money and a partner to move forward at a pace suitable for the government. Another potential negative is political risk, but note that there is no history of asset seizure by the government in PNG. Also, note that both the old PM and the new PM support IOC and they know the importance to the wealth of their country. Look at the budget and Sovereign Wealth Fund legislation for evidence of such.
Prior to the 2011 spike in LNG transactions for similar properties were ~2/mcfe, more recently ~3/mcfe has been seen. The question is at what price will a selldown of IOC assets occur and at how much of a discount will IOC trade for after the transaction? Feel free to use your own estimates, but to allow for a suitable margin of safety I am going to say 2/mcfe and that IOC will trade at 50% of NAV post-transaction. If 1.50/mcfe price is placed upon IOC’s contingent reserves (5.5 Tcfe from E/A and 2.75 Tcfe from B/T), then the firm would be worth 257.94/share. Of course, it is unlikely to trade at the selling price per mcfe, so let’s say it trades at 50% per mcfe, then IOC should trade at 128.97 per share. Very nice given the firm current trades at 50 per share and has a huge inventory of prospects and the likely substantial increase in the size of B/T based on seismic results. These numbers also help explain why insiders spent 42 million of their own money to buy IOC shares during the last offering.
To see how the price per share calculations are made go to: https://docs.google.com/spreadsheet/ccc?key=0AshAH1SVj0t5dHB0b3A1c1hQT0FscHBtcHpzZVMwZXc&hl=en_US#gid=0
I welcome discussion about these numbers.
Best,
Sam
- admin - 12-28-2011
Thanks a lot Sam, this is good stuff. We'll have a look at the numbers. Although partly captured by flow rate, but there are other characteristics of the resource which show it's quality. The fact that there is a dolomitized reef on top, rock with very good porosity and permeability (in Ant2 flow test, all the gas came from the top few% of the resource)
The size of the payzone, with 2277ft and 1175ft of net pay, these wells are very large indeed and only a few have to be drilled in order to supply the plants.
- Palm - 12-28-2011
Thanks Sam! Will give your calc a look-see. I also agree that risk is slowly ebbing in PNG as far as IOC goes. This project is very important to that country. The SD partner will be very important in the next steps and will be interesting to see how PNG handles the selection by IOC. If not Shell, will they try to stonewall?
- Tree - 12-28-2011
Thanks Sam,
For some to argue $/Mcf values in the pennies for E/A is ridiculous.
In his 2010 CC with Calio, Henry addressed nearly each of your variables; resource size, pipeline length, extraction costs, location near Asia, political, production costs, and then some and calls E/A 'Advantaged Gas'. Always able to get into the market and it will attract premium pricing as it is advantaged.
Henry asked Calio "Why do you think Japan immediately bought up as much of PNG LNG's LNG they could get? Is it because they like XOM so much?"
Henry goes on to describe how OTkers in PNG LNG understood the advantages in the PNG LNG gas. Truth be told, PNG LNG economics and resources pale in comparison to IOC's scheme.
- admin - 12-28-2011
Yes, if one simply compares it to US shale, where 80ft of pay is considered excellent and wells have to be made to flow by fracking and horizontal drilling, and where gas sells at $3.5 per Mcf..
OK, the gas doesn't have to be liquified and the US has a more stable business climate with less political risk, but deals have been going on in shale for significant amounts and the resources really are inferior.
- Tree - 12-28-2011
If there existed 2 identical homes, one in a ocean-side gated community built on the most prime acreage and the other built in a run-down lawless slum neighborhood occupied by resentful and bitter neighbors that covet your money and are willing to make your life miserable.
Which identical home would have the highest value on the open market?
- kerekesc - 12-29-2011
I don't mean to belabor the point, but when the IOC project reaches FID, the NG assests will be booked as reserves. Companies with reserves are valued by the market at a significantly higher price. And, IOC will certainly have a greater reserve with each passing year. I am expecting significantly higher pps.
- Petrovale - 12-29-2011
Sam, it's hard to argue against the numbers, which make perfect sense to me. The real question, in my opinion, is how IOC management, assisted by the investment banks, is going to structure and package the deal(s). How are they going to present a comprehensive business plan to the market in order to maximize shareholder value over time?
I still believe MS' base- and bull cases provide reasonable guidance.
Petro
RE: Price per mcfe valuation analysis - Tree - 01-28-2013
Time to whip out the Sam Bam!!
Recalling XOM's Ping Ling buy-in price was $2.20/M. PNG LNG gas cost to LNG plant is $7 and IOC's gas cost to LNG plant is negative, thanks to condensates. Should IOC fetch a higher price based on higher project profits??