'IOC: Eve of Transformation' Morg Stan Update

[jft310]

The delay in this report may have been timed as when they were legally okayed to resume full coverage which requires them completing their part of the deal
Or another check off the list

[Tree]

Morgan Stanley is (was) one of the investment bankers for "THE DEAL". They had to suspend coverage of IOC stock during deal talks. It looks like the deal is done, or at least Morgan Stanley's part.

Full PDF report attached.

To further support your point, I find it interesting the report comes out on the 15th......3 days after the cc.  Analysts are typically more timely issuing reports.

Bet you we get a MacQuarie update soooooon .  'Any day can be the day final for that' as Hession would say.

[Palm]

Interesting point Stavros has been making. Why do these reports not discuss the value of the wet gas and the condensates? This I think will be an AHA moment when we see the real/final deal terms! Just like the AHA moment everyone had this week after Hession spoke.

The condensates issue is hardly a new point; that has been a point made for years to especially distinguish IOC's resources from Aussie CSG.  The liquids make a huge difference in IOC's favor along with the fact that the gas as is will meet the high standards of Japan's markets.  There is no requirement for treatment of teh NG to reduce it's undesirable content.  Aussie gas cannot say that so not only is Aussie gas dry gas, it needs to be treated to meet Japan's needs.

[Tree]

Interesting point Stavros has been making. Why do these reports not discuss the value of the wet gas and the condensates? This I think will be an AHA moment when we see the real/final deal terms! Just like the AHA moment everyone had this week after Hession spoke.

The condensates issue is hardly a new point; that has been a point made for years to especially distinguish IOC's resources from Aussie CSG.  The liquids make a huge difference in IOC's favor along with the fact that the gas as is will meet the high standards of Japan's markets.  There is no requirement for treatment of teh NG to reduce it's undesirable content.  Aussie gas cannot say that so not only is Aussie gas dry gas, it needs to be treated to meet Japan's needs.

Thanks for that Palm.  Exactly how else would IOC get to a negative gas cost for conditioned gas delivered to a Gulf LNG plant??  As well Hession's only AHA moment as far as I could discern was the revealation of the $250,000,000 loan.  The rest of hs comments were affirmations of reports/comments in the public arena basically.

[Palm]

Interesting point Stavros has been making. Why do these reports not discuss the value of the wet gas and the condensates? This I think will be an AHA moment when we see the real/final deal terms! Just like the AHA moment everyone had this week after Hession spoke.

The condensates issue is hardly a new point; that has been a point made for years to especially distinguish IOC's resources from Aussie CSG.  The liquids make a huge difference in IOC's favor along with the fact that the gas as is will meet the high standards of Japan's markets.  There is no requirement for treatment of teh NG to reduce it's undesirable content.  Aussie gas cannot say that so not only is Aussie gas dry gas, it needs to be treated to meet Japan's needs.

Thanks for that Palm.  Exactly how else would IOC get to a negative gas cost for conditioned gas delivered to a Gulf LNG plant??  As well Hession's only AHA moment as far as I could discern was the revealation of the $250,000,000 loan.  The rest of hs comments were affirmations of reports/comments in the public arena basically.

Thanks for that Tree.  The $250 million loan facility was the "shut-up" moment for shorts.  All we heard down the stretch was, "Yeah but they must be about out of cash.  The present loans are mostly for the refinery and downstream and given their past rate of cash burn they are running on fumes as far as cash goes.  And then there's the licenses.  And they aren't drilling because they don't have cash to drill.  Hession is probably ready to resign.  Sigh..........."

Not so fast my friend.

[ArtM72]

Two interesting numbers mentioned in the Calio report but not addressed, the price PRE is paying IOC for gas. A final deal with whoever anywhere close to those numbers would pretty much blow Calio's bull case. Then, I loved the chart showing the companies on the S&P with the leading short interests. Ouch :-)

[Kaliboo]

A few reflections and a little celebration from a an old oil and gas well engineer still working full time but who was off today and watched the market ALL day long; something I never do.  If you recall the Q3 conference call, Dr. Hession talked about drilling wells very soon BETWEEN E/A and Triceratops (as well as other exploratory and appraisal wells), and how that relates to the historical chances of finding more hydrocarbons.  Indeed there is an old saying in the industry that has proven itself countless times over:

"The best place to find oil, is in an oil field."

I've personally witnessed if from my vantage point in a super major, especially when we've sold old "depleted fields" to an independent.  Amazingly the independent finds a lot of reserves all around the main depleted reservoirs that the super major missed.  It happens over and over again.  But sometimes the super major simply drills blindly in a different direction from all the other wells or maybe deeper below the existing producing reservoirs, below where seismic cannot "see" and they discover huge volumes which can extend the life of a field by decades.  Similarly, onshore independents kept working on the technology to unlock the gas (and now oil) from onshore shales.  Super majors knew it was there from their own drilling but were impatient on working how to unlock it and moved on to other "more attractive plays."  The independents persisted and came up with the working technology forumula to unlock tight gas accumulations in shales that previously were uneconomic.

In PNG super majors punched some holes in the past but weren't able to dream up geological models that worked.  These are simply the theories and guesses based on their geological training of how various mechanisms in nature may have interacted to create hydrocarbon accumulations in different places on earth. So they gave up when they didn't find large accumulations to meet their minimum volume requirements.  Their models did not succeed.  But IOC have come up with their own geologic model and interpretation of how the sediments were laid down and charged, and have with at least two discoveries so far, determined THEIR MODEL WORKS.  The structure and traps are there, reservoir quality rock is there, the source rock is there, and the structure is  charged full of gas.  So now they are expanding their exploration and appraisal plans to replicate the prior steps OVER AND OVER AGAIN using their model; but this time MUCH FASTER!!! thanks to Dr. Hession's more CORRECT VISION on how to accelerate value for the company.   They are drilling fairly shallow for the easy stuff into seismic amplitudes that look most promising.  (Maybe there are deeper accumulations to be explored later in what will be by then, IOC's producing gas fields.  That's typically how it unfolds down the road.)  Delineation of the size of these discovered big boxes of hydrocarbons and their connectivity and water contacts, will determine how many wells will be needed to drain this stuff and what the probable recoverable volumes are.  They are drilling straight holes so far.  They will/should be making technical assessments as to what type of wells to drill for the development wells.  E.g., a long slant hole or even a horizontal well would likely require a different rig with more capability, but might deliver wells with twice the productivity OR HIGHER and require FEWER wells to develop the volumes at a lower cost.  So drilling similar untested structures CLOSE BY AND BETWEEN the existing discoveries is the "finding oil in an oilfield" practice.  There is a very high probability of finding MORE HYDROCARBONS than drilling e.g., many miles away.

Given that there are multiple similar structures to drill, one starts to get giddly wondering what the resource estimates and proved developed reserves will be by Dec 31, 2014 and beyond.  Undoubtedly a sizeable amount of resources will no longer be classed as "resources" but will be on it's way to appearing on the balance sheet as PROVED DEVELOPED RESERVES, wherein the book value of IOC currently between 15-16 $/share will start to take large incremental jumps as each entry is revised.  Once the numbers are "officially on the books", analysts and speculators (especially those shorts fond of harping earlier this year over and over again by saying, "IOC has NO RESERVES." will have to up their valuation and their projections for the valuation.  As we know "the first deal" will unlock this door.  The door or dam holding down the valuation is leaking steadily since the Nov 12 CC but will burst wide open (in my humble opinion) to make this week look like bargain pricing.  Drilling is no sure thing, but we have confidence in the IOC geological model and so do several super majors. Since the day he arrived, Dr. Hession is doing exactly what I'd be doing:

Get the first deal done BUT drill it as quickly as you can the rest of the prospects, and they will come to buy it.

The faster you drill it, the faster you can make discoveries, the faster you can prove up volumes, the faster you can derisk the volumes, the more attention you will guy from super majors, the faster the supermajors can formulate an offer, and the faster you can sell it.  Bigger volumes mean bigger opportunities and economies of scale for super majors, which means more LNG trains and greater profit margins, and thus the ability to bid A MUCH HIGHER PRICE.  I still don't think the market gets it yet.  Just give em time.  As I said previously, while we have to have a deal for the first quantity of gas to break through that barrier, DRILLING IS THE REAL VALUE MULTIPLIER.  Yes you need partners to build the delivery system, but that is not a question of IF, it's only a question of how big and the agreed price.   Mr. Mulacek was the right leader for the right time, which was leading the company to arrive at the right geologic model and finding these great opportunities.  But he was mistaken on the path to create the most value the fastest.  He had dreams of a being fully integrated oil company and building LNG plants which led him astray.  We now have the right leader for the future which is to rack up the HC resource volumes as high and as quick as he can.  Onward CHARGE!!!!!!!DRILL BABY DRILL!!!!

[ArtM72]

Thanks for that Tree.  The $250 million loan facility was the "shut-up" moment for shorts.  All we heard down the stretch was, "Yeah but they must be about out of cash.  The present loans are mostly for the refinery and downstream and given their past rate of cash burn they are running on fumes as far as cash goes.  And then there's the licenses.  And they aren't drilling because they don't have cash to drill.  Hession is probably ready to resign.  Sigh..........."

Not so fast my friend.

Palm (or others) -

Any guess on the implication of the $250 million loan with that syndicate down the line?  Would it be safe to say, with Hession's comment of maintaining a future banking relationship with them, that the group would be in an immediate position to finance the buildout, be it pipeline, CSP, Train 3 and/or Gulf LNG?  Seems to me Colin/Hession already may have the banks on board for FID.  Comments?

[Palm]

Art,
It's a little early to know for sure what this syndicated group's appetite is for full blown project financings. After coming through the world recession banks are getting more of an appetite for risk; much more than back when PNG had to go to IPIC to secure financing for its PNG LNG state because banks had seized up in 2007-08.

My guess is that this syndicate will see how this first facility goes; based on their DD it's pretty obvious that all parties expect a sell-down to happen quickly. The terms give IOC all they need to operate and quell any bidder thoughts about bleeding IOC dry of cash by delaying negotiations. They also anticipate a quick payoff of the facility. Once that happens and IOC is derisked, new negotiations for a facility can take place and IOC can have in place credit on normal terms (LIBOR without a rate kicker). A partnership with a supermajor will have banks lining up to lend a helping hand.

Look at lil ol EWC. They have had Standard Charter backing them for years on their projects. IOC will likely have a similar setup. They have to in this industry.

[Stavros]

Project Financing is engineered by lenders if they can stomach the risks associated with the enterprise. When XOM was lining up lenders in 2009 for the PNG LNG project they couldn't get enough money so they had to lend a large chunk from their Corporate coffers ... the risk was too high and money was scarce. Now that the project is near completion the cost for future projects in PNG are known to the industry/ banks and the risk for further projects in PNG is lower.

http://www.eagletraders.com/loans/loans_...inance.htm

Suppose IOC has to come up with $1.5 Billion to cover their cost of the project.
They must put up about 35% in cash and borrow 65% (give or take depending on how generous the lenders will be)

The interest rate on what they borrow will be Libor + 3-4% during construction.

Libor rates are always published; current overnight Libor is about 0.6%
12 month is higher.
You never pay Libor without a premium; no one will do that in Project Finance.

http://www.global-rates.com/interest-rat...onths.aspx

So IOC will pay on the order of 4-5% interest on the $1 Billion they borrow.

Would you join a bank syndication to lend the money to IOC knowing that XOM would be running the show, basically duplicating the recently completed project?? The cash is repaid based on XOM's performance, not IOC's.

Of course you would.
All the major banks have money and are ready to lend it to high quality projects.