FCF analysis of E/A – Comments welcome

[sltibbs]

Please comment on the spreadsheet valuing E/A Condensate and LNG. It is only for 14 years and is conservative in that it does count CSP plant profits (since IOC would own 50% (+/-) and tolling fees are high), unused E/A dry gas, etc. I did 14 years because at CGR of 17.2 I reached the best case for the Condensate. There was still a lot of gas left, but that is OK, adds another level of conservatism. With all the interacting parts, makes it very hard to estimate.

Also, notice I did the expansion case. I feel the risk is whether or not there is a project, not whether it is expanded.

Numbers are changeable, adjust as you feel free.

Comments are welcome. I apologize in advance for any errors.

See https://docs.google.com/spreadsheet/ccc?key=0AshAH1SVj0t5dE1qOXNuN0VRZHJZbUtpb2JfUU02MUE&hl=en_US#gid=0

Thanks,
Sam

[Putncalls]

Sam,

I think you have IOC paying to much tax. I would think they should only pay on their share of the revenue. I think you have them paying a 30% tax on 100% instead of 56% of the revenue.

[petrengr1]

Sam-Thanks for you work. I will have to leave these calculations to you folks who know how to do it. Someone asked for my input regarding flow rates from the field. I believe you have followed the IOC forecast of LNG plant installation which is the best we can do.

Regarding the flow rates to be expected from Elk/Antelope I would suggest that it will be controlled by the size of the LNG plant facilities. So the trick on the cash flow calculation will be to properly predict the size and startup date of the plants. Again, the best we have is what IOC has forecast.

Once the Plant size reaches it maximum capacity the production rate should be maintained flat at that rate for many years. While the reservoir pressure will be declining the reservoir will not be being produced at its maximum potential so the production can be maintained at the plant capacity for many years by increasing choke sizes and/or drilling more producing wells. We do not know if the reservoir will have any water drive from the aquifer to support the reservoir pressure. Phil has indicated that the reservoir is a pressure depletion type reservoir which I believe is what GLJ thinks. That means they expect very little or no water drive.

Toward the end of the life of the field the reservoir pressure will be so low that the production from the field will decline for several years but, from a present worth standpoint, these years will not be very important. The field has enough gas to supply 10.8 mtpa for 17 years. We know production will be ramped up as we build the plants and it will taper off at the end of the life of the field but I do not have a good way of estimating the life of the field. A wild guess might be 3 years to ramp up, 12 years at constant rate and 10 years at declining rates until the reservoir in depleted. This is not much different than what you have suggested.

What is important is to get the plants built to the maximum planned plant size as quickly as possible so that the early years of high and constant production can commence. That is what it would take to maximize the present worth value of the project in my opinion.

[sltibbs]

Putncalls,

I do tax 100% of the revenue in order to calculate the entire CF generated by the project, then using IOC's ownership I take the percentage of the CF attributable to IOC. In other words, only a portion of the taxes paid are actually paid by IOC.

Also, I prefer this method of calculation (as opposed to reducing revenues to IOC's portion) because it shows how much total will go into the PNG tax coffers. Large motivation for them to favor the project.

Best,
Sam

[sltibbs]

Petrengr1,

Thanks a lot for your comments. I appreciate them. Also, glad you like my work. I hope you benefit from it as much as I benefit from your posts.

Best,
Sam

[efi426hemi]

Many many thanx for taking the time Sam, it is most appreciated!

Health and Happiness,
efi

[sltibbs]

Efi and others,

My pleasure, I am happy to contribute.

Here is a post I made on Yahoo related to the recovery of sunk costs and carryforward. Essentially, it adds about $4/share to today's value, but this is only an estimate.

Here is the post (http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_I/threadview?m=tm&bn=26290&tid=318931&mid=319224&tof=8&rt=1&frt=2&off=1):

sfiaes,

I am going to try and estimate the present value of the sunk costs to be recovered and the loss carry forward. Next, let me say that I would appreciate the input of any accountants out there.

It is hard for me to know the exact amount of sunk costs in the development of Elk/Antelope. Q3 2011 report says, "The majority of the costs capitalized under ‘Petroleum Prospective License drilling programs (Unproved)’ above relates to the exploration and development expenditure on the Elk and Antelope fields." So a large portion of the 330,346,730 in Net Capitalized Costs would have to be returned before there would be any taxable income. Add to this, the costs I estimate to further the program to operational status, For my current model that is IOC's share of 910 million, which I have listed has a total of 465 million (155 million a year for 3 years). I would expect the mjority of this would be depreciable as opposed to sunk and I don't know in what proportion. So maybe we could guestimate sunk costs to be 300 million total. That would mean 300 million less in taxes, probably increasing FCF by 200 million in 2015 and 100 million in 2016. Thoughts?

After recovering sunk costs then the accumlated losses should be carried forward to offset future income. The accumulated deficit as of Q3 2011 was 255,143,006. I am uncertain of the carryback and carryforward rules in PNG. Presumably, it can be carried forward adequately to recover all the losses. Applying these will require some adjustments to my model since I calculated the total taxes for the project, not net to IOC. At the 30% tax rate this deficit is worth $75 million in future value dollars (probably 2016 becuase the sunk costs would be recovered first), so in present value worth significantly less.

Rough math (200/(1+15%)^3 + (100 + 75)/(1+15%)^4) means the PV of FCF increases by 231.56 million which equates to 4.82 a share assuming 48 million shares.

I believe this to be correct, but I apologize in advance for any errors.

Best,
Sam

[sltibbs]

I made a new model. Here is the post and link from Yahoo. It will quickly be buried there.

How much is IOC's worth based on plans for future condensate and LNG production from Elk/Antelope?
I modified the prior model to produce the p50 estimate of condensate and natural gas (before I stopped LNG production once the Condesate p50 level). Based on a Condensate to Gas ratio of 17.2 it takes 14 years to produce the Condensate and 19 years to produce the NG. I also adjusted this model to recover sunk costs and to benefit from past tax losses (carryforward).

The model can be found at: https://docs.google.com/spreadsheet/ccc?key=0AshAH1SVj0t5dDU3dXlhbkEyMnFHWkN4eDFONkR3aEE&hl=en_US#gid=0

At a 15% discount rate, I get a present value of 149/share. Note that once the CSP and LNG prlant become operational the PV of FCFs increases dramatically.

Since I do not know what a selldown will look like, I left it out, but the numbers are adjustable. So change them as you would like. If you think they will sell 10% of E/A at 1.50, then reduce the "% owned by IOC" in cell D8 by 10% (this is low by some estimates, but remember the supermajor may also simultaneously buy out some of the drilling partners) and then add the 1.27 billion from the selldown to the share price estimate (10% of 8.49 tcf * 1.50). If I do this the 1.5 billion adds 26.53 per share. Add that to the new lower estimated share price of 121.04. This estimates the stock price to be 147.57/share. I would like to add though, that post selldown the discount rate should be decreased. If you drop it from 15% to 12%, then the stock price estimate becomes 187.23 (160.70 + 26.53). Anyway, put in what you believe to be the most likely scenario.

Lastly, comments, positive and negative are welcome.

Sam

[admin]

Sam, thanks for all the efforts! Now a questions, that 15% discount rate, can you put a little more meat on that? Why 15%? It seems to me their cost of capital could be considerably less..

[Palm]

Sam, thanks for your work on this. The following link takes you to the Internal Revenue Commission of PNG's site and the area where it discusses the tax implications for resource development companies. Hope it helps. To qualify for the reuced tax rate of 30% IOC must be granted a PDL by 12/31/2017. We all of course assume that 2017 date won't be a problem :-D

Hope this is helpful:

http://www.irc.gov.pg/income_tax_03.html