We wrote a SA article, arguing that based on GLJ's best case (9.9Tcfe), IOC would get a $4.1B payment (simply reading that from a pay-out table, the table is not in dispute) for the selling of a 45% stake (net of PNG govt. participation, it's not in dispute they will participate for 22.5%).
Then adding a value for the remaining 30% stake that InterOil keeps ($2.6B), adding it up to a valuation of $6.6B. The only assumption we made is to start from the GLJ P50 case (very aggressive, to start from the official resource evaluation's best case!). Note also that our calculation:
- Assumes 10M new shares for buying out IPI investors, while RJ analyst Pavel Molchanov calculates as a worst case $248M
- I assume zero value for IOC's 30% stake in a future LNG plant, build and operated by Total
On the latter, see Westlake:
InterOil will retain 30% net interest in PRL 15 and potential LNG plant, which represents the largest potential upside. We value the integrated LNG plant at ~$1,800/ton of owned capacity in today’s dollars and $3,100/ton just before start-up... We believe that for a 30% share of a 7.0 mmtpa LNG plant, IOC should receive a time discounted but unrisked valuation of ~$3B or $62 per share, which is net of the investment required.
Again, we assumed $0 for the LNG plant and more than twice the cost of an IPI bail-out compared to RJ's analyst. Hardly aggressive valuation, we think.
Then a guy called Keubiko (see the comment section of the text, starting with the very first one)
1) Jumps on a completely irrelevant typo in the text
To "show" that our calculation is off by more than 2x (see the very first comment to the article):
Your numbers are wrong and substantially overstated. Understandable as IOC's "clarifying" press release just added to the confusion. The $1.5B in payments at the 5.4 tcfe level are the cumulative total of all payments including the up front completion payment, FID payment, and First LNG Cargo Payment.
The actual variable payment at the 5.4 tcfe level is $698 million, minus an adjustment for some of those carried costs which are also deducted. You're overstating by more than 2X. Same errors flow through the rest of the analysis.
2) Re-doing our calculation with a lower number, for a purpose
To show that, he redoes our calculation, pretending the typo in the text was material for our calculation (it wasn't) and curiously starting with a much lower resource number (5.4Tcfe, see quote above). This isn't curious as it enables him to greatly exaggerate our supposed error, which isn't even there in the first place. So not only does he pretend there is an error in our calculation which isn't there, he uses a trick to greatly exaggerate it's magnitude.
3) False discount
He's not done there. Him redoing our calculation with a lower number, apart from enabling him to greatly exaggerate a phantom error, also enables him to argue (once again, from the very first comment):
Of course this must be discounted back to present value terms as it's a 2016 event at the earliest. And of course it's contingent on FID so a risk weighting should also be applied.
Well, it turns out that the timing of the resource payments from Total is as follows:
- $613M at the conclusion of the deal Q1 2014
- Variable resource payments up to 5.4Tcfe at Fid (expected in 2016)
- Variable resource payments above 5.4Tcfe at certification
- Fixed payment of $112M at Fid (expected in 2016)
- Fixed payment of $100M at first LNG cargo
That is, of the $4.1B that Total will pay out if GLJ's P50 number pans out by the resource certification, by far the biggest part will be paid at or before certification, that is, 2015! A substantial part will be paid as soon as next quarter ($613M), most of it at certification (variable payments for resource above 5.4Tcfe). The only parts which will be paid at Fid are:
- The $112M payment
- The variable resource payment for gas below 5.4Tcfe.
And of course, there is the $100M at first LNG cargo, but this is a rounding error in terms of discounting. Payment for resources up until 5.4Tcfe is much smaller because:
- Up until 3.5Tcfe no variable resource payments are made
- The payment per Mcfe is lower for resources between 3.5Tcfe and 5.4Tcfe than above it
So the variable resource payment below 5.4Tcfe both dwarfs compared to the payment for resource above 5.4Tcfe and arrives later (at Fid, 2016, instead of certification, 2015).
So "re-doing" our calculation with a smaller number not only enabled him greatly dramatize an error which wasn't even there in the first place, it also enables him to argue that most of the payments will arrive in 2016, rather than 2015, and accuse me of not discounting properly.
Done on purpose? We let the reader decide, but his inabilities of reading us correctly add up. We'll also come back to his choice of this 5.4Tcfe, as there is another reason for that (see below)
4) No comments were removed
He then accuses us of having asked the removal of his first comment, which we didn't, which is still there (it's the first comment), and which actually contains the evidence that he didn't even look at the calculation but remorselessly exploited an irrelevant typo in the text, so why on earth would we ask for its removal??
5) Argues that we confuse gross and net
Again, our calculation is consistently on a net basis, that is, after PNG government participation (22.5%). If he had only looked at it, he might have discovered for himself.
6) Refuses to budge
No matter how many times we explain to him that the typo was immaterial to the calculation we made, he refuses to look at it let alone apologize and keeps on obfuscating by quoting stuff from the text that is completely immaterial to the calculation.
7) He accuses us of taking Fid for granted
Again from that first comment:
And of course it's contingent on FID so a risk weighting should also be applied
Funny, as in a a newer article (Dec 28 2013), he himself argues:
I have assumed that a Final Investment Decision (FID) is made with 100% probability, even in the case of a low (e.g. 3.5 Tcfe) certified resource amount. The theory being that Total could add gas from elsewhere
8) His new article
Curiously enough, when he himself calculates value for IOC starting from the same 9.9Tcfe that we did, he arrives at a value of $87.21 per share! And he accused us of being off by a factor of more than 2x!
Why is this curious, well, since he so rubbished our calculation, and argued we should have done it on a per share basis (we simply assumed readers could do this themselves), lets see where we ended up. From our own article:
While the chances of new discoveries in PRL15 are pretty high, it would be silly to include stuff in a simple valuation exercise, so we stick to the $6.6B for PRL15, dependent on GLJ's numbers being confirmed by up to three appraisal wells and two new appraisal exercises.
We then went on to add 10M shares for the IPI buy-out (something a certain Habibi argued, well after the article appeared with a whole section dedicated to that, that we didn't do, but anyway), which gets you $6,600/60 = $110 per share. Yes, that's above his valuation, but not all that much. Certainly not by a factor more than 2x.
And remember that the RJ analyst argues that our IPI buyout is more than twice what he thinks, and we have added zero value for the 30% stake in the LNG plant of which a Westlake report argues it provides the largest upside. Here is Keubiko himself in his new article
The main takeaway from the above four points is that whether these items add or subtract a few bucks per share is immaterial in the context of InterOil's deal with Total. The factors that completely dominate the company's valuation are simply how much contingent resource will be certified in 2015 when the delineation wells are drilled and the resource evaluators do their work
Indeed.
9) Resource probabilities
So it's all about the resource evaluation again. Keubiko (and Habibi) in a comment to Tilson's article, argued that apart from calculating on a per share basis, I should have included "probabilities", like Tilson did.
To start off, we have no idea what the basis is for Tilson's probabilities. We asked him in the comment section, but no answer was forthcoming.
10) Total PR and "Helia Tec"
Here is Keubiko again (in the comment section of our SA article):
Now, having said that, if the resource is certified at 9.9 tcf there is upside in the stock (from the new blown-down price), but what I think would be a more prudent approach would be to pay based on what Total is telling the world they expect, and hope it comes in higher
"Total is telling the world.." We're not aware Total is telling the world anything about the size of the resource, but here is Keubiko again in his last article:
At 9.9 Tcfe (GLJ's current estimate), IOC would be a compelling value at these levels (~64% upside to the current share price). However, using the 5.4 Tcfe on which Total based its payment estimate in its press release, there is downside from here (~40% to the low $30s).
It's clear what they do, they read a resource estimate from the Total PR:
Total will pay $470 million for a 42% interest (32.5% if the government executes its option to join the project) with a contingent payment estimated by Total at approximately $590 million.
Again this is quite revealing:
- First of all, you see that Total itself understands that the PNG govt will buy-in (and treat them as equivalent, which they are as the PNG govt. comes in at cost)...
- While Keubiko usually goes through the official documentation (in this case that would be the SPA) but for reasons only known to him doesn't chose to do so here.
The SPA itself doesn't reveal any "new" info about the size of the resource, it simply contains an escalating scale. So he uses a PR, rather than the official deal papers, when it suits him, yet goes to great length to argue PRL 15 is actually worth $5B based on an obscure court case against Helia Tec, in order to dramatize the obligations to the IPI investors:
If Helia Tec is representing to the court that 1.2% of this amount is worth $9.2 Million, mathematically 100% of the IPI Percentage would be worth $763 million ($9.156 / 0.012). And as this block owns 15.13% of PRL 15, it implies 100% of PRL 15 is worth an almost even $5 Billion on a gross basis ($763/0.1513). Given IOC owns about 75.6% (gross) of PRL 15 currently, the read-thru value of IOC's stake is approximately $3.8 billion, or about $78 per IOC share... Valuing the entire 24.4% minority interest on the same basis that used in the Helia Tec bankruptcy case would yield a total minority value of $1.23 billion.
The resource is small and not worth a whole lot according to the Total PR, but worth a lot according to Helia Tec. Can Keubiko make his mind up? One cannot have it both ways. Especially not in the way it suits him..
