BUYOUT, The Math of Present & Future

[tarulestheday]

I want management to issue a P/R stating that they "turned down an offer for $1XX per share" because it represented only a fraction of management's estimate of fair value.

That hasn't happened because that is not how it usually works. This recently played out in the mid cap semi space. Potential buyer CEO 1 calls (or emails more likely) CEO 2 to float a merger or buyout offer. CEO 2 rejects for various reasons (too low in this example). CEO 1 continues to contact CEO 2 with higher offers but none of these approach an offer that CEO 2 is willing to take seriously to the BOD. Result, CEO 1 has made multiple offers to CEO 2 with substantial premiums, but the personal judgement of CEO 2 never let these offers see the light of day for the BOD or the shareholders. I'm not saying this happened to IOC but I have personally witnessed this process with other public companies.

[Getitrt2]

Admin - I have grown to believe the short case is NOT dead, only limited to the argument that the PNG government is currently disorganized and no deal can be reached by IOC without government approval. The absolute silence by all parties with respect to what is going on would be remarkable if there was something of value to say. There isn't. As it stands there could be a grand plan revealed tomorrow that only heads of state and negotiators are aware of, or negotiations have been postponed pending resolution of PNG political barriers. Who knows? The best thing that could be done to move this project forward is to restart drilling and find out what's in Ttops and what if anything is in Wahoo. If successful the first would give Gulf the guarantee of an LNG plant, the second would give XOM their expansion. Either would get IOC gas monetized and value to the shareholders.

IOC IS preparing to drill Wahoo (probably spudding by November), and Triceratops (after additional seismic work underway), but only in conjunction with reaching a deal with Exxon and possibly others, not in order to.  Your suggestion is definitely NOT the "best thing".

I cannot believe you could expect some "play by play" on such negotiations.  That does NOT mean there is no progress and it won't get done.  The PNG government has expressed support for them and I feel sure is NOT a "barrier" to an agreement being completed, announced, and then followed by a Gas Agreement with the government, constituting its approval.

This is about as unjustifiably negative a view as I have heard from a shareholder.  If the above is really what you expect, you should get out now and move on or try to get back in later;  but I think you would be making a big mistake.

[TxPm]

So I'm going to stand somewhat in the middle...I believe most of the short arguments are crap and aren't real. Ie "no Gas", no SM is interested etc...with that being said the one short argument I have heard recently that I think is semi valid is that the deal will be delayed significantly due to the politics of PNG. I believe this argument has a very low probability of happening and does not make up for the strong upside argument. Once the deal is done I see literally no reason to be short the company at all. For what it's worth I think a lot of the shorts are underwater on this position and simply increase their position every time the price gets high to increase their cost basis

[ebster123]

[quote='admin' pid='28894' dateline='1379533115'] I just asked you a question, Tarules, could you not simply ask your friend if you never asked this before? I mean, what HF? What "negative forces"?

Simply ask?  I have begged and bribed the same set of contacts for years. After all that, I really only have a small list of HFs that are short IOC. Negative forces seem obvious - RDS, Duma, OSH, and the largest shorts with deep pockets. We are not dealing with amateurs on the short side.

I am really amazed that some people are surprised when they chastise people who speak "off the record" on topics they hear from "contacts".  True, some might be bogus but some are not.  We all hope the people posting are longs and hence whatever we get should be to bolster and not beat down IOC.  Give the guy a break, Tarulestheday is by far not the most guilty of this and in fact, is not guilty at all, nor is anyone else.  I am frustrated as much as many.  Three years in and nothing to show for it.  However, I remain expectantly hopeful.  Thank you Tarulestheday, T

[Getitrt2]

some of the other longs previously resistant to the concept of a sale have turned their resistance volume down.

Ebster - If we are still waiting for a SD deal in Q1 of 2014 (which I believe we will) I suspect prior longs holding out for $400 long term valuations might start thinking buyout too. If any long had stated in 2010 that we would still be waiting into 2014 for a sell down, they would be branded a liar, short, impatient idiot, etc. Yet here we are.

It is unfortunate for Dr. Mike that he took over after an extremely drawn out process. But many other O&G explorers announce deals all of the time without years of promises and drama.

WRONG.  "Waiting into 2014 for a sell down" is NOT correct yet for "here we are", which is just September;  but perhaps that is not what you meant.  I guess it's a possibility, but I do NOT believe we will.  If we are still waiting January 2, you'll get a "You were right" from me.

"Many other O&G explorers" are not small companies of limited means that achieved the biggest gas discovery in Asia in 20 years contrary to all current understanding of the geology in the undeveloped jungles of PNG, and then had to completely change course during a two-year government crisis, and negotiate/compete with the biggest major and national oil and gas companies in the world to monetize it, and without the senior executive and support to do it until now.  That is not a reasonable  comparison at this point if ever.

I understand the fatigue and frustration and feel it too,but I almost feel like I am responding to bonk, sussman, or other such poster on Yazoo, and that is disturbing, since I have respected your postings for a long time.

[Getitrt2]

You spoke with the manager of the hedge fund and don't kow the name of it?

That is NOT what I stated in my original post.

Geez, I think I am about done posting here. My source manages more $$ than most of you can possibly imagine.

What part of USE OR FLUSH do you not get?

I was asking about the name of the hedge fund whose manager you spoke with, not the short hedge fund.  Maybe you just met him at a party and don't know it, or he or you don't want to disclose it, which is fine.

I did not mean to be critical.  I'm not even sure why I asked, just a natural curiosity or tendency to ask questions, I guess, and probably don't need to know anyway.

[Getitrt2]

Movie, I agree with you conceptually, but IMO doing this kind of evaluation using 30% as an alternative rate of return or discount rate is inappropriate, and frankly ridiculous.

Getit, by calling 30% "ridiculous," I don't think you actually agree with me conceptually.  You're not getting that 30% is not meant to be a normal rate that MBAs plug into their powerpoint presentaiton.  It is an emotional rate.  It is what people here require to pass up a 100 - 300% profit in order to have faith that a 500 - 800% profit looms in the not overly distant future.

What return rate does someone require so as not to be able to retire?  What rate does one require to question his intelligence as he continues to listen to his wife complain that a deal will never happen?  What rate does a goldbug require when he feels now is the perfect entry point to make a fortune, but he has little funds to invest?  What rate does one require when good news comes out on IOC, yet the Shorts manage to move the share price lower?  What rate does one require to send their child to their 3rd choice college because they can't afford choices 1 & 2?  If anything, maybe 30% is too low a rate when you think about these things.

What do others think?  What is your rate to pass up a $250 price in September 2013.

Movie, I believe I do understand, but an "emotional rate" would be irrelevant in a buyout situation.  If an attempt were made to buy out the Company, the suitor would be subject to the shareholder rights provisions, and would also have to get the approval of the majority of shareholder ownership.  Since most of the outstanding stock is held by institutions and insiders, basically none of the frustrated shareholders on SHU  or elsewhere would have the opportunity or necessity of selecting a sale price based on an "emotional rate".  I  think those circumstances will prevent a buyout at a "bargain basement" price, as ready and willing as some frustrated and impatient shareholders here might be to accept one.  I nevertheless think it was an interesting and worthwhile  posting, except for some of the resulting responses.  Thanks.

[Movieguy]

Thank you, Getit. I appreciate and respect your opinions, though I may not agree with all of them.

[Tusker]

There is much talk on SHU of a buyout, which elicits posts of "I'd be happy to get $XXX," or "$XXX isn't nearly enough because the company is worth $400/500" or whatever high number.  To those in the latter category, I'd like to suggest you more closely consider the math.  What is a $200 buyout today worth compared to $500 in three years?  Or two years?  Or $250 today versus $400 in two years?  Or one year?

By not getting a buyout today, one pays the opportunity cost of not getting to use that buyout money for something else, be it a different investment, paying for childrens/grandchildrens educations, buying a sportscar, buying a vacation house, having enough money to retire, and on and on.  We all have the different things we would do with the money, and in some cases I am betting it would make large positive differences in our lives.  For me it would allow me to develop more movies, some of which I could foresee returns greater than 100%, but just as importantly, I would be spending more time on my passion.

My point is that when using a "discount rate" on the opportunity cost, I don't think we should be comparing it to the current interest rate on T-Bills, or a good investment rate return, say 8-10%, or any numbers like that.  We here at SHU are dynamic (though prudent) risk takers, and we probably know of other good/great investments or have more passionate things we'd rather do with our money than wait around reading posts at SHU and waiting for IOC to FINALLY get a deal done and hope the Shorts don't find a way to still depress the stock price.

So I say that if one is not willing to accept money in a buyout today, one should expect an excellent return on the continuing IOC investment.  I peg this return rate at a minimum of 15% and suggest it should be more like 30% or higher.  So if one accepts this concept, what does turning down $200 or $250 or $300 today really mean for buyout prices you expect in the future?  If you look at the tables at the bottom of this post it tells you.  The number in the upper left corner is the interest rate, and the numbers to its right are years 1-3.  The numbers down the left column are the forfeited buyout prices of today, and the rest of the chart shows you what that interest rate times that buyout price is worth each year, with compounding.

To cite one example, a $250 Buyout today needs to be worth $432 in three years, just at a 20% rate.  At 30% it needs to be worth nearly $550.  You can look at the charts and see where you fit in.  This is not a definitive financial analysis, as it does not take into account taxes, etc., but is just presented to illustrate the point that the buyout prices being bandied about today in the $200 - 300 range, really are not so different than buyout prices of $400 - 700 that may come over the next few years.

Those of us who want a buyout, or at least a public release of buyout offers that IOC has already been made aware of (one way or another), want to see the utterly stagnant pps (no gain in 4 years or so) start to reflect the value that is already in the company.  Once a buyout possibility is on the table, no matter how low (and I don't think it's going to be below $150), other companies will insure that the eventual winner does not get a steal, and that the final price is a fairly accurate representation of IOC's true worth at the time.  So a $160 bid today could easily become $230 or $300 within months.  Most importantly, the current pps will then reflect these developments, and each shareholder can choose his exit point based on his own circumstances.  My best to all Longs.

15	1	2	3
200	230	265	304
250	288	331	380
300	345	397	456
20	1	2	3
200	240	288	346
250	300	360	432
300	360	432	518
25	1	2	3
200	250	313	391
250	313	391	488
300	375	469	586
30	1	2	3
200	260	338	439
250	325	423	549
300	390	507	659

Future is full of drama... I wll watch the from this seat.  20 TCF resource.

My fine regards to RY

Cheers

Tusker

[jft310]

I am with Tusker. What's been discovered pales in what can be discovered. In the US much further away to premium buyers Japan types a producing NG company with 10 T's has a market cap of $30 Billion and I see IOC with 10 T's with a market cap of under $4 Billion and see nothing but possibilities. IOC needs production in a timely fashion with major partners with deep financial pockets and all is well. That's why Dr Mike is in board.