Every Potential Molecule of Gas

[efi426hemi]

As everyone knows, conversation is ongoing re: drilling Ant 7 prior to certification.  I hope to shed some light on the IOC mindset with this course of action.  First, there are always pros and cons.  Let’s start with the cons:

• Cons
  
  • Delay in certification payment
    • 3-9 months
  • Cost to drill
    
    • It was communicated to me at the AGM that IOC would own this drilling cost
      
      • For the record, that doesn’t make sense to me as I would think the JV would share this cost, anyways, moving on
  • Potential to add no discernible increase in resource size
• Pros
  
  • Potential increase resource to size

Now, when I pointed out at the AGM that 1^st quarter cert payment might end up being 2^nd quarter 16*, Hession responded that I should be more worried about every potential molecule of gas as opposed to timing.  Fair enough, I think it gives a pretty clear answer into how the company is thinking – more gas > time delays to cert payment.  So, the question then becomes, why is every extra gas molecule so important?  To answer this, I think there are 2 things to consider:

1. Current project FID timeline of 2^nd quarter 2017
   
   1. Drilling Ant 7 will have zero impact to pushing out the FID date
2. Operational cash until 2021 LNG plant go live

To determine necessary operation cash lets calculate our expenses first (high level back of napkin approach):

1. Expense Details
   
   1. LNG Plant: 16 billion times 36.5% IOC interest times 30% cash down = 1.752 billion
   2. Drilling**: 4 wells/year at 50 million/well times 6 years = 1.200 billion
   3. Seismic***: 50 million/year times 6 years = 300 million
   4. Other: 25 million/year times 6 years = 150 million
2. Total Expense: 3.4 billion

So what is our income:

1. Income Details
   
   1. Current Cash: 394 million
   2. Certification payment: Assume 9.9 Tcf = 1.717 billion
   3. FID payment:  517 million
2. Total Income:  2.628 billion

772 million shortfall - through to 2021. This could be addressed by:

1. Farm-in deals
   
   1. not good unless prospect is proven up based upon what we saw from the Total deal any their unwillingness to pay for gas potential
2. Dilution
   
   1. 25-40% dilution – ouch!
3. Don’t drill Tri, Wahoo, Raptor etc
   
   1. Now we wait 5 more years before additional trains are added or juicy farm in deals are completed
4. Spend an additional 3-9 months and drill Ant 7 and Ant 8 if necessary
   
   1. 400 million for every extra Tcf over 7 Tcf
   2. No impact to FID date or LNG plant go live

So, if we choose option 4 and certify 12 Tcf instead of 10 Tcf – our 772 million dollar shortfall disappears.  After seeing this, I believe I know why Hession said that I should be more worried about every potential molecule of gas and why he  isn't so worried about my above listed negatives.  But that is just me, you decide.

Health and Happiness,

Hemi

p.s.  I also confirmed that they will not drill Ant 7 unless they feel it will add >= 1 Tcf to the resource size and of JV approval.

 

*Cert date timelines - Ant 6 spud 2^nd half 15 (assume Sept 1), assume 60 day drill and 30 day test, plus 4-6 months to analyze the data and which pushes us out to May 31^st.

**50 million may to too much per well, however we would like to drill more than 4 wells per year as we found out from the Total deal – companies won’t pay for potential or p10.   Would like to see 6-7 wells in Tri, Raptor, Wahoo, etc

***28 million in 4^th qtr/14 and 51 million in 1^st qtr/15 – seismic costs