Where will IOC get its project money? What?!!

[Tree]

If the correct number needed is $500mm, I agree we shouldn't be worried about that.  However, I do have an issue with some of the assumptions above.  I'm not sure how anyone is going to put a $22bn valuation on E/A with this few wells drilled.  My sense is that people don't pay $2/mcf for a project in its infancy like this (I hope I'm wrong!!), when everyone knows they need to sell a piece to appease the local government.  And as much as I hate to agree with Bonk and his clown friends on yahoo, claiming that the PRE deal was at $3/mcf just isn't correct, imo.  So much of that number is back end loaded and has risk attached to it, you cannot value it in today's dollars.  There needs to be a big discount.  The way I've approached IOC from a takeout standpoint, the best case scenario i'm hoping for is this.

1) Assume someone pays $1.10-$1.15/mcf

2) Give IOC 4.5tcf net at E/A, and 2.5tcf net at Triceratops

3) Pay $1.5bn for the refinery and remaining land leases

So I get to about $185/share

If someone can show me an example of majors coming in and taking over projects like this at higher valuations, I'd love to see it.  But I don't think someone coming in and buying a piece of a project where a major is already involved, or where there's been far more extensive drilling, are applicable here.  I'm talking about a very small company doing an early stage independent project that gets bought by a major.  I'm more than happy to be wrong on all of this as it means more $$$ for everyone.

I raised this point on an earlier thread and don't think i ever got a response.  But if we look at the COV deal, that looks like they got bought out for under $1/mcf.  Yes, I know it's offshore mozambique, but it's also a huge field being operated by Anadarko.

If someone is willing to pay anything close to $2/mcf, I can't understand why we wouldn't sell it all.  To me, the point of these things are to make discoveries and sell them for $2-$3/mcf, and move on to more exploratory drilling.  Why would we want to stick around for all the operational risk?

bam-bam,  Mitsui valued E/A at 22$ Billion by agreeing to swap a $550mill CSP for a 2.5% stake in E/A in Aug. 2010.  Me thinkie we get blown away as Phil has alluded to, with the $5-$7/M deal, with just how valuable E/A is to the bidders.

Tree, I don't think you're understanding of that deal is correct.  The estimated costs are $550mm, and Mitsui is responsible for arranging the financing.  They are not responsible for paying for all of it.  I think that IOC was simply looking for assurances that Mitsui would use their huge balance sheet get the best terms possible for debt deal.  The actual debt will be shared equally by all the partners.  In addition, they paid $6.3mm for the option to acquire an additional 2.5% of the E/A field (on top the the 2.5% they own from completing the structure).  So a couple things here - in the end, IOC will not own the 58% of the field that they currently state - because the Mitsui option has not been factored in.  And in no way did the Mitsui deal imply a $22bn valuation on E/A.  Here is an exerpt from the 2011 10K

On August 4, 2010, we entered into a definitive Joint Venture Operating Agreement ("CSP JV" (see

“Material Contracts&rdquo for the CS Project with Mitsui, which agreement replaced the preliminary agreement

entered into in April 2010. The capital cost for the condensate stripping facility was then estimated at $550.0

million, with approximately $32.0 million of this to be expended for FEED. Under the CSP JV, Mitsui is

responsible for arranging or providing financing for the capital costs of the CS Project in the event that a

positive FID is made in respect of the CS Project. An option deed was also executed with Mitsui under which

Mitsui was granted an option to acquire up to 5% of the Elk and Antelope fields, and in our proposed

liquefaction facilities. Mitsui paid $6.3 million in exchange for this option, with such amount to be refunded in

the event that positive FID is not reached by the agreed upon date and the option is not exercised. An

adjustment is to be made against the final acquisition price in the event the option is exercised.

Bam-bam,

Clarification here of the Mitsui/IOC JVOA deal.

Mitsui FUNDS the CSP 100% and retains only 1/2 ownership with IOC for doing so.  IOC receives FREE, 1/2 ownership for allowing Mitsui to FUND 100% the CSP.  Cost of CSP was guestimated at $550 Mill.

CSP deal is no different is arrrangement than EWC or SHI/Flex.  IOC's partners in ALL these deals are required to FUND the respective production facility 100%.    EWC and SHI deals do so in exchange for a 14.5% royalty of LNG sales.  Mitsui agreed to FUND the CSP 100% and either be an equal partner with IOC in CSP ownership OR Mitsui has the option to convert their 50% ownership in CSP into a 2.5% stake in E/A.  The option agreement allows Mitsui to buy an additional 2.5% E/A interest at the $/M price set by the first sale to  to a 3rd party E/A investor.

Mitsui will own 1/2 of a CSP they funded 100%.  Mitsui has an option to convert that 1/2 CSP interest to a 2.5% interest in E/A.  That places a value on E/A of $550 Mill for a 2.5% stake, or 22$ Billion for E/A.  Mitsui will surely convert their 1/2 ownership in CSP into that 2.5% E/A stake as if they do not they will remain 50% owners in a CSP they paid 100% for.  From memory, the $/M price Mitsui assigned to E/A in 2010 was about $2.2/M in the JVOA valuations.  If 3rd party buys in at 1.5/M, then IOC owes Mitsui $.7/M and likewise, if IOC sells a stake for $2.5/M Mitsui coughes up another $.3/M.  This is why I like it when I hear Phil is driving a hard bargain, we do not want to go back wards on the CSP deal.

So yes, I stand by the $22 Billion E/A valuation that Mitsui/IOC CSP deal was structured around.  Real valuations to be determined by market buy-in, and those valuations should be higher in 2012 than they were in pre-tsunami JP.

We soon see.

From IOC presentation this spring, see page 3, 2nd, 3rd and 4th items listed.

http://www.interoil.com/presentation/201..._Final.pdf

These bullet points seems to agree with your sense of the deal Tree, although that is not how I would interpret the actual project agreements.  Looks like I'm wrong on that front.  But even if you're right, the $22bn still doesn't make sense..So they fund $550mm project for 2.5%, and then paid $6.3mm for an option to buy another 2.5%.  So if they exercise everything, they have paid $556.3mm for a 5% stake in the field (this is in the bullet points you reference as well).  That values the project $11.126bln.  It's not $22bn. I agree it's 22bn if you only look at the first part, but then it's only $120mm on the second part! Regardless of whether an analysts said it was $22bn, they are clearly getting 5% of it for $556.3mm.  The other thing I'd point out again is that IOC's 58% stake in the field isn't factoring in the 5% that Mitsui will take - and the bullet points in the presentation are saying that they are giving away 29% of the revenues of the LNG plant.  Does anyone know if these percentages are from the entire pie or IOC's share? If they are from the big pie, I'm trying to figure out how much IOC will actually still own when all is said and done, assuming they stay through until development.  Thanks for the discussion guys. Always helpful.

Wham-bam,

Mitsui IS NOT getting 5% of E/A for $556.3 mm.

Mitsi paid $6.3mm for OPTION to buy another 2.5%.

Mitsui DID NOT pay $6.3 mm for 2.5% stake.

Remember, the 2nd 2.5% stake cost will be SET by the 3rd party buyer.

We will get the actual Mitsui buy in costs soon as the SD will place market prices on E/A.

The $550/mm for 2.5% of E/A is what IOC and Mitsui pre-agreed was a fair valuation so the CSP could move forward.

So YES, the Mitsui valued E/A at 22$ Bill per the CSP JVOA, no other way to look at that, $22 Billion is the best number to date.

As for the rest of your questions, we chewed all that up 2 yrs. ago and the bottom line was IOC's share of the cash-flow from LNG sales was humongous.