Morgan Stanley update

[admin]

The culmination of the 3-year process is expected in March. Since the second Antelope discovery in late 2009, which established significant resource potential and resolved the matrix debate (in our view), IOC's value has largely related to the elusive and value-clarifying sell-down and partnering process. While the last three years have witnessed positive operating momentum (higher resource estimates, exploration success and maturing exploration prospects), the monetization process has proved challenging. The company states resolution is likely in March as IOC has announced it received several binding bids on February 28th and its Board will meet with advisors during March to evaluate bids and select a partner. Interest sale and partner selection, is necessary to monetize the resource, fund additional exploration and provide definitive credibility regarding IOC's resource.

Lines are drawn: short interest is near record levels (~30% of float) while long-term holders largely add, per recent filings. Large positions have been established on both sides leading into this binary event. Consensus is Friday's selloff was attributed to fears of an equity offering following IOC's $1Bn universal shelf filing. However, the day prior, IOC stated on its 4Q12 earnings conference call: "[o]ur previous shelf expired in September 2012 and like all prudent companies, we'll be looking at replacing it, given the open debt levels, as this will add to our financial flexibility." Reference to leverage could also relate to potential leverage associated with LNG construction.

Contingent resource estimate increased by ~10% to 10.3Tcfe. Independent engineering firm GLJ released its Dec 31, 2012 resource report: 10.3Tcfe Best, 7.7Tcfe Low and 12.8Tcfe High. The upward revision was a result of two 2012 wells: Antelope 3 and Triceratops 2. The resource added was associated with Elk & Antelope (54%) and Triceratops (46%). Despite only .4Tfce from the first Triceratops well, we note per IOC: "[o]ur original pre-drill assessment of the Triceratops resource potential of approximately 4 Tcf of gas in place has not changed." Management sees upside resource potential.

[Palm]

Great job STP. Thanks for posting this and helping clarify what's going on. Interesting how the short camp continues their campaign in the teeth of reality. But wait. That's right. MS just wants to get more fees from the next stock offering, right? The fees they bring in from helping their client conclude the sell down process successfully and avoiding a stock offering are far less important, right? Please tell us that MS isn't just making this all up and then working with IOC behind the scenes to deceive shareholders and help their hedge fund friends. Stop the madness!!

[admin]

I think there is a mistake in the report, here is what the CC says:
["on January 9, 2012, Pacific Rubiales Energy paid a third cash payment of $20 million under the advanced payment facility. Closure on the next $56 million is expected in the coming days, upon completion of all conditions preset."]

That is, IOC already got the third $20M installment and they are expecting the remaining $56M to arrive soon ("coming days").

It's a small error, but anyway.

[TxPm]

Great report and great catch STP on that minor error. One question I do have for the group & maybe one of the Pet's can answer this. Calio mentions early monetization of Triceratops & my question is from a structural/logistical standpoint assuming we conclude the sell down within the next 60 days what's the most likely way we will monetize T2? Thanks

[petrengr1]

The MS report says Elk-3 will be a sidetrack of Elk-2. I think this is an error and I have emailed Evan Calio for clarification. Elk-3 is supposed to be at a location considerably up dip from Elk-2 according to what IOC has told us and I believe we have pictures of the Rig-3 at the new location. I do not think they have moved the rig back to the Elk-2 location but, if they have, this is a change of plans that has not been made public until now.

[algon223]

Question: What is the meaning of "++ " as the Rating in the MS report ?

Is it because they are one of the IB and therefore cannot currently issue a rating?

[sageo]

The MS report says Elk-3 will be a sidetrack of Elk-2. I think this is an error and I have emailed Evan Calio for clarification. Elk-3 is supposed to be at a location considerably up dip from Elk-2 according to what IOC has told us and I believe we have pictures of the Rig-3 at the new location. I do not think they have moved the rig back to the Elk-2 location but, if they have, this is a change of plans that has not been made public until now.

Pet- I too believe this is an error . Anxious to hear answer from Evan.

[petrengr1]

Great report and great catch STP on that minor error. One question I do have for the group & maybe one of the Pet's can answer this. Calio mentions early monetization of Triceratops & my question is from a structural/logistical standpoint assuming we conclude the sell down within the next 60 days what's the most likely way we will monetize T2? Thanks

TxPm- Here is my guess about how IOC will monetize Triceratops. We will drill the up dip reef location southwest of T-2  next and then one or more wells to the west and northwest of T-2. Several wells will need to be drilled in the west and northwestern part of the field in order to delineate the size of the structure and determine the quality of the rock (porosity, permeability etc.) PRE may take a larger percentage of Triceratops and/or a Super Major will be brought in to be the operator. A process much like what we are seeing now at PRL-15 will take place and we will have a CSP at Triceratops, a pipeline to the Gulf LNG plant location and another LNG train with ownership matching the ownership of Triceratops Field. It has been suggested that the gas will be brought to the CSP at Elk/Antelope but I think it would be better to have the CSP at the field location. It would be better from an operational standpoint and, with different ownership, they will probably want their own CSP.

This process will probably take 3 or 4 years as we will need to drill enough wells to prove up the field and get the contingent resource number up considerably from what we have now. Once again, we need to know what we have before we try to sell it.

Just my opinion of course.

[TxPm]

Thanks Pet. So in your opinion we could begin to see monetization from Triceratops not long after we begin seeing monetization from Gulf LNG?

[TxPm]

Algon, I saw no one had answered your question so I will. Your correct MS won't put a PO on IOC bc of the conflict of interest with their IB side. If you look back at old MS reports before they were one of the IB's Calio had a PO on the stock and from what I understand we could see a PO again post SD but we will have to wait and see