THE DEAL

[Hoosier1]

Hoosier, as to your item #4: "#4 - as to any upfront payments... the improvement to cash will have to be offset on the balance sheet" Are you looking at this as a negative? How would you be expecting the cash to be "offset"? I am not an expert on oil and gas industry accounting, but have been a CPA, and I would expect the cash to correspond to a major credit to shareholders equity on the balance sheet, probably after some lesser reduction of capitalized cost for development of PRL 15 for the portion being sold. There is nothing negative about that.

Get

Not looking at it as a negative... more as the "market" may view it as being a non-issue in share price valuation

I may have incorrectly read/assumed ITs "...carry for the infrastructure..." in providing upfront cash more as a loan... for IOC's expenses for the pipeline and thus to be repaid via future gas, etc...

All in all, I appreciate all of this threads discussion.

[ltinvest]

I don't quite understand how LT can state XOM will spend another $billion on E/A wells. Per p51 of the annual report: "We have spent $268.0 million on PRL 15 which includes seismic, Herd Base/Hou Creek wharf and camps, roads, FEED for wells, gas gathering, condensate stripping, and pipelines". That includes I trust the 5 completed wells. Per the presentations to Raymond James and IPAA earlier this year IOC is projecting 8 mtpa (about one million cu ft/day) will require 5 - 11 wells. Just for the sake of argument, @$25M/well (pretty high with existing infrastructure and limited testing!) that's 40 more wells! I seem to recall Antelope 1 and 2 combined for more than a mmcf/d by themselves. Seems to me a lot of LT's argument on the value of IOC's first 4 TCF (at $1.25) is that it gives the company a way to book the rest of its reserves and get the $1/mcf for the condensate. If there were a case to be made for incompetent IOC management, by God sale at that price for those reasons would be it.

Art, please read my post(s) again.  Nowhere did I state Exxon was going to spend $1 Billion on drilling at PRL 15.  What I do know is Exxon will likely carry IOC for the delineation wells and recertification (as with the required infrastructure). Interoil believes there is more than 9T's at E/A.

Also, please don't mistake my partial answers to someones elses question as my understanding or assessment of the complete value proposition for this deal.  What I can reiterate is we should expect a deal in the $1 to $1.50/mcf range .  Pavel consistently references the 5 year,  $1.20 average in the region.

Rest assured the IB's have been going through the excercise of calculating the value of the vastly different bids that were submitted.

[ltinvest]

Also, while a terms sheet has been signed between Interoil and Exxon, there are still details being negotiated/ finalized. Some good points/questions have been raised here. I don't know at this time if IOC will have an interest in additional PNG LNG trains. Others may have better information on that topic.

[Petro2458]

Ok, a few thoughts:

. The net present value of the elk/antelope gas and liquids using XOM view of capital and opex using an 8% disc factor is the most XOM would be willing to pay...because if they paid a full NPV 8% for the project then they would effectively be accepting only an 8% rate of return...not much profit for them.

1.  I'm assuming the value of the stock would equate to the net present value of all the cash flows from a single LNG train where IOC holds the same interest from the reservoir to the LNG sales point.  Exxon uses 8% disc factor

2.  I'm timing the capital required for a single train over 3 years of construction.   If a train costs $5.7b over the next 3 years, then the net present value of these investments would be more like $5b or so.  Depending on discount rate.

3.  I'm scheduling the operating expense in annual buckets over 25 years ...$117 million per year

4.  I then create an annual cash flow before and after 30% tax... Which adds up to something very big...it's not in front of me but you end up with a cumulative cash flow after tax, opex, and capex of $50b or so.  The cash flows are discounted back to today's dollars...and you come up with a net present value for the project.  There is no other way to do this... It just is what it is.  How you handle tax and terms can vary...but the methodology is sound.

5.  Best way to find extreme values is to run sensitivities on price, capital overruns, additional trains , etc. ...

6.  The other thing that is useful is looking at the project in 100% terms.  Meaning ..assume IOC gets 100% of the value from selling LNG and liquids, no govt't take.. This would be the absolute highest value you could get from a single train project.  Period.  I haven't done this..but will and post .

IOC provided cash flows in a pack posted end September last year.

id be extremely disappointed if we were not equity owners in the 3rd train commensurate with the PRL 15 ownership split after the sell down...otherwise what's the point?  We need a revenue stream to book reserves

hope that helps explain my logic.

[ArtM72]

Art, please read my post(s) again.  Nowhere did I state Exxon was going to spend $1 Billion on drilling at PRL 15.  What I do know is Exxon will likely carry IOC for the delineation wells and recertification (as with the required infrastructure). Interoil believes there is more than 9T's at E/A.

Also, please don't mistake my partial answers to someones elses question as my understanding or assessment of the complete value proposition for this deal.  What I can reiterate is we should expect a deal in the $1 to $1.50/mcf range .  Pavel consistently references the 5 year,  $1.20 average in the region.

Rest assured the IB's have been going through the excercise of calculating the value of the vastly different bids that were submitted.

Sorry LT for the misunderstanding.  Your post (#20) above stated:

"- I think JFT is right in that XOM will probably be spending another $1 billion or so on additional drilling in PRL 15, starting probably with Elk 3 and Antelope 4, and there may also be some drilling in other prospects in the PRL such as Mule Deer, a formation adjacent to E/A."

I just took that to mean somehow figured into the writedown of the sell price for 4 TCF would be the cost to drill another billion's worth of wells.  

So long as I'm at it, given the cost to produce and maintain for 20 years a half billion cubic feet per day of Australian coal seam gas well capacity just never has equated in my mind to the cost of drilling and maintaining production in IOC's E/A field.  Did someone forget those wells  all flow at over 100,000,000 cf/d without fracking?  I somehow expect the CSG equivalenc may have been Shell's negotiating position, and maybe why in some quarters Mulacek became unpopular.  He likely wouldn't tolerate listening to that kind of nonsense.

Nonetheless, this thread shows if anything the kind of complexity involved in coming to a rational decision on such a major project...even when all the players are acting in good faith, which we know has not always been the case.  I'll be patient.  Strong hands I think is the watchword for the wise.

[Palm]

Ok, a few thoughts:

1.  I'm assuming the value of the stock would equate to the net present value of all the cash flows from a single LNG train where IOC holds the same interest from the reservoir to the LNG sales point.  Exxon uses 8% disc factor

2.  I'm timing the capital required for a single train over 3 years of construction.   If a train costs $5.7b over the next 3 years, then the net present value of these investments would be more like $5b or so.  Depending on discount rate.

3.  I'm scheduling the operating expense in annual buckets over 25 years ...$117 million per year

4.  I then create an annual cash flow before and after 30% tax... Which adds up to something very big...it's not in front of me but you end up with a cumulative cash flow after tax, opex, and capex of $50b or so.  The cash flows are discounted back to today's dollars...and you come up with a net present value for the project.  There is no other way to do this... It just is what it is.  How you handle tax and terms can vary...but the methodology is sound.

5.  Best way to find extreme values is to run sensitivities on price, capital overruns, additional trains , etc. ...

6.  The other thing that is useful is looking at the project in 100% terms.  Meaning ..assume IOC gets 100% of the value from selling LNG and liquids, no govt't take.. This would be the absolute highest value you could get from a single train project.  Period.  I haven't done this..but will and post .

IOC provided cash flows in a pack posted end September last year.

id be extremely disappointed if we were not equity owners in the 3rd train commensurate with the PRL 15 ownership split after the sell down...otherwise what's the point?  We need a revenue stream to book reserves

hope that helps explain my logic.

Makes great sense Petro. I might add that the present subsea pipeline is already sized to accommodate a 3rd train, so it might be quicker to cash flows than we might think. Building CSPs does not take all that long and the wells and gathering lines plus the pipeline from CSP to the coast to tie in to the present PNG LNG pipe might be able to happen in less than 2 years and I would think the 3rd train could also happen quickly. What are your timing estimates for this 3rd train given the present subsea pipeline already is big enough? Same as you say above, or sooner?

[Petro2458]

So it's sized for 1.8 bcfd? Ok... Interesting. I doubt the pipeline is critical path... Timewise...but agree in single train this would save on capital.

I assume first gas in q4 2016.

I by no means have the cash flow pegged...a lot of unknowns. But I do not believe we are worth $300 ...that comes later with more discoveries. I'm looking at IOC being valued very similarly to OSH ... And once we get terms we will know more about 1p reserves base to help draw this analogy.

Great thread...look forward to THE DEAL!

[jft310]

Here's a fun fact for ya. IOC's costs to find each mcf are 5 cents. And they will sell that NG for $1-1.50 per mcf plus Exxon carry costs. Nice return on your money or what.
Few more:
The $1 Billion dollars in Exxon drilling carry fund for IOC is not just for E/A. With this money they hope to prove out another 15 T's of NG. Time period 18 months after the deal closes.
Most of the pipeline costs are a further carry by Exxon for IOC
The infrastructure costs at Gulf by Exxon are a further carry for IOC
The CSP costs are a further carry by Exxon for IOC
Condensates are included in the deal .
The LNG partication of IOC in Exxon trains is a negotiating item. Maybe 15% for IOC.
Thats how you get an effective price of $3 per mcf for this train , but that second train doesn't have those carry costs if it decided upon. More cash for IOC.
Then we have EWC talk again where IOC will have a 2 mtpa start up and own 85% of the proceeds. EWC is 100% financed and Exxon will build the CSP for IOC.
Source an IPI partner.
Use it or trash it .

[Petro2458]

Interesting, thanks JFT.

I have been hoping that XOM gets operatorship of PRL 15. It would drive more value for total resource base vs just getting value on the 'deal gas'. That detail has been noticeably left out...operatorship... Presume still up for grabs. XOM operatorship drives more value from total E/A in my opinion. No one will give any value for the "marginalized" gas if this is only a 1 train deal. At least not until a firm plan is FID'd.

15% of LNG isn't much IMO. Hope it's better. This percentage is where reserves will come from.

Put it this way...if we sell e/a for $5b (over time... Discounts to what? Current stock price?)..and do if we do not own a meaningful stake in LNG production..then we trade flat until more discoveries are made..


I'm jaded...the best of the best explorationists have failures.... I want to secure long term revenue with E/A...not sell it for cash that potentially gets expensed as dry hole costs.

[jake990037]

"... if we do not own a meaningful stake in LNG production..then we trade flat until more discoveries are made.. "

Yes, this I think is crucial.