Appraisal of the Macquarie report

[Relker]

Last month M(=Macquarie) published an update report on Interoil. Being an expert in the oil-business the report is regarded as an important beacon for professional investors and also other analysts. Boardmembers of Shareholdersunite should closely monitor this report and challenge the authors if necessary. By providing a break down of the IOC-valuation (page 5, fig 2) M. gave more insight in its kitchen than other professional analysts mostly do. M. should be praised for this approach.

JFT already  launched a thread on SHU which triggered many reactions. Most posters showed deep respect for M. and did not challenge the conclusions. At first glance I was also overwhelmed by all the financial ratios etc. I really had to consult Wikepedia to interpret all this freaking info.

But after that, it struck me that the E/A period uptill 2016, E/A FID, was specified very thoroughly whereas the period beyond 2016 was treated  soberly on page 7, notwithstanding the fact that in 2016 the music starts for IOC. Having specific know how in the oil industry one should have hoped for more guidance from M.

Combined with some other substansive issues I want to share my  comments with you and invite you to give your reactions. After receiving your reactions I would like to update this comment and send it to the M-authors:

1.       Plant size: Macquarie assumed a 7.1 mtpa capacity. Given the appraisal upside on tie-in distance , this is a very low figure, which has a big impact on the valuation. It seems to me that M. did not make a proper consideration in this respect. It would be more logical to base the calculation on a 12 mtpa plant with a 30% risk discount and to forget all about appraisal upside in the tie-in area.

2.       Stand alone plant vs teaming up with PNG LNG: according to the report a 2-4 B saving is ascribed to the team up scenario. This looks to me huge. Apart from some infrastructural investments like a jetty there is not so much to win. Furthermore, I fancy that they will reserve the spare capacity of the Highland pipeline for developments in the Highland. Meanwhile a Japanese consortium announced plans for a DME plant. Teaming up with this partner could save the cost of the liquefaction step. This could bring far more savings.

3.       Project profitability Antelope LNG (page 7, fig 6):  M. calculated  a NPV amounting to U$ M 11,216.  I made the same calculation and arrived at U$ M 13,710, see enclosure. The difference in valuation looks like to be the condensate sales. Furthermore, M. is ambiguous regarding the discount percentage. According to page 7, fig 6 M. used 10%, but on page 1 M. states 11%.

4.       Cash & Investments: The equity investment in the new JV, being U$ B 1.2, is deducted from the license payment. However, the same amount is also included in the cash flow calculation under point 3, see page 5 and 27 and enclosure.      

[Palm]

The 7.1 mtpa is reasonable as it is based on the GCA estimate which has been accepted by many as reasonable given what we know today. For M to vary from that estimate before any tie-in drilling would make their estimates of value guesswork.

[Stavros]

Don't mix 7.1 TCF in PRL 15 with annual liquefaction capacity. The size if the complex will be set only after the Design Studies are completed and licensors provide information on their processes and what their technology can accomplish for the specific gas composition. One Train capacities are 3-4 mtpa. To go to 12 mta would require 3 Trains which is not prudent.

PNG LNG spent a huge amount of $$$ building the airport, which won't be necessary if TOT/IOC/OSH make the mistake and build the complex in the Gulf. If they build it adjacent to PNG LNG they will install a longer pipeline but they will save a lot of money on site preparation, infrastructure and off sites in addition to the very expensive 6 km long jetty. Also, the construction period will be much shorter, which significantly reduces the cost of a major project. Every day saved on the schedule saves the cost of paying 10,000 workers!!

[Putncalls]

Nice summary Starvros! Thank you.

[Stavros]

Nice summary Starvros! Thank you.

Take a look at these two papers regarding LNG plant costs. They are well done and very informative.

http://www.kbr.com/Newsroom/Publications/Technical-Papers/LNG-Liquefaction-Not-All-Plants-Are-Created-Equal.pdf

http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/02/NG-83.pdf

NOTE ...  there are some LNG Trains in Qatar that are 7.8 mtpa each. I don't know how they manage to build them so large. I'm trying to find out how it's possible

[ebster123]

Strvos, great work, thanks!!!

[jft310]

Together we know more which is much more worthwhile than whinnying about things not under our control.

[Palm]

"The difficult part of this plan is to define what is “right” in order to achieve the lowest cost and the shortest schedule. “Lowest cost” is the most crucial driving factor in every project. Although Life Cycle Cost is often cited as a criterion in plant design, it seldom becomes more influential than lowest capital cost. This paper will determine the major contributors to the cost of an LNG plant and why certain elements are necessary, which add a corresponding, and unavoidable, cost."

We know that PNG gives big advantages this way and IOC's finds so far will only add to that with their large reservoirs (yes plural) and locations which are closer to the coast and PM.

Interesting papers.

[Palm]

"Figure 8 depicts cost breakdown by category, showing that the largest single cost item is construction at 35% historically. Hence projects in areas with high construction costs such as Australia will be far more expensive and construction can account for up to 50-60% of the project cost."

[Stavros]

Good point on location Palm.

In Australia the EPC contractors are required to use scare/high cost Australian labor
In PNG the EPC contractor can use low cost imported labor who also have quite high productivity factor.
So building in PNG might be 40% versus 35% historical and 50%+ in Australia.

Building a plant in Gulf versus adjacent to PNG LNG and near Port Moresby probably adds 10% to the cost due to logistical issues.

And, as I said, since labor is the highest percentage cost of a project, a new design versus a duplicate will add significant costs due to additional construction time.