The Crucial Elephant: $/mcf Versus Participation

[Movieguy]

It seems to me the elephant in the room that is often mentioned but never comprehensivelyy discussed in anything to do with Interoil is the relationship of the $/mcf that Interoil received or will receive for its gas, and the amount of participation in a future plant or future train in an existing plant.  This lack of clarity invades all discussions and analyses, and causes various misunderstandings.

Let's take an analogy.  Suppose you own a building with 10 storefronts.  I want to buy 2 of those storefronts to run my business out of.  So we start to negotiate a price and I say $5000 each.  You say that is a reasonable price, but you want a deal where I only pay you $3000/storefront and you get 25% of the future profits of my business.  I say, "That's crazy.  I'm not going to give you 25% of profits for just saving $2000/storefront.  I'll pay you $2500/storefront, and you can have 10% of my future profits."  So we negotiate, and eventually we reach a purchase price for the storefronts, along with a percentage of profit that you are going to get of my business.  Let's say that agreement is $3000/storefront and 20% of future profits.

Now if you (or someone else) are trying to evaluate what your other 8 storefronts are worth, or perhaps storefronts in another building you are getting are worth, you can't just say "$3000/storefront and 20% of future profits," if "20% of future profits" is ignored because it is an indefinite amount well into the future.  Value HAS to be put on that, and the easiest way is to recognize that you and I were willing to lower the purchase price by $2000 in exchange for that 20%.  Though others could guesstimate what the 20% is worth (or ignore it, as the stock market and some analysts do with IOC and its partcipation), only you and I, who were involved in the negotiations, really know what we agreed it is worth.

My point is, I believe IOC has an obligation to give everyone a clear understanding of the value of participation relative to the $/mcf that it did not receive in exchange for that participation.  Once that is understood, in very concrete terms, everyone will be able to value IOC with enormously greater clarity.  Though perhaps some exact specifics need to be kept "confidential" (insert ominous musical accompaniment here), it is too critical a component of understanding IOC's value for it to remain shrouded in vaugueness.  

[jft310]

Movie guy in my opinion MH can't show all his moves to us. He has been hired by the BOD to play chess with the masters and will report to the BOD what his future moves might be. We will never get that level of detail and no company reveals that level of detail . These are sensitive negotiations that have many moving parts. To reveal your strategy to the person on the other side of the table is not wise. We have to trust this very experienced LNG executive to deliver the best industry standard deal that makes sense. May I suggest you search the board for Relker's posts or Sam Tibbs posts both of which offer excel spread which you can play for different scenarios . I am sure both would not mind answering some questions you might encounter. Hession is not in the what is business with us. He's delivering our future ..

[Getitrt2]

Both of you make some very good points here.

[sydbod]

Movieguy, How does one put value on being able to participate? IOC will still have to pay for its share of the infrastructure. It does not get something for nothing in this case. The closer analogy would be " how much value does IOC have to sacrifice (by selling equity in its discovery below retail value) to get itself into a position where it can monetise the remainder of its resource.
How one puts a monetary value on it, I have no idea. The only way forward for this (by my view) is to look at a destination point (IOC producing LNG) in the future. Calculate what the income stream happens to be then, and equate a value for the company at that time based on the income stream. Allow a realistic (normal bank interest rates of 3 to 4% is not realistic) discount from that end point to now, and we have a current value for the company. Take this current value and divide it by the current IOC held resource size and we have a realistic value for the gas. ........ anyone want to try this procedural calculation?

[jft310]

Make it easy go to the Westlake report on these pages they tell you the value of LNG plant. Wall Street does this everyday ,the model is called a discounted cash flow model . That's what Sam Tibbs and Relket have also put up on this board . Their models are interactive. One needs to make assumptions , have fun.

[Palm]

Yep, I think these calculations have been done 110 times here and elsewhere.

[sydbod]

Thanks jft310 for that info.

[sydbod]

OK, so I give the company a value of between $3Billion and $4Billion. (slightly modified approach)
Can anybody give me the number of shares IOC has issued Please? (it is bloody hard to find)

EDIT: scrap the above share count., don't require it. TKS

So we have around $1 to $1.33 per MCF for the gas.

Will be interesting to see how negotiations develop.

[Palm]

Annual report is best source for that

[jft310]

What makes it hard are the assumptions. Everyone knows GCA is low . Why did Total agree to upside on the payments? Why the $1.29 tranche with unlimited payment? How much gas is there?. Will Henry Aldorf be right 12-16 T's.? How big is Antelope Deep.? is it another Antelope???

This is why the use of Relkers and Sam Tibbs interactive models is fun. One can play with the numbers.

Everyone agrees there is enough gas today for a stand alone plant or an Exxon expansion , maybe both?