Raymond James’ valuation of IOC

We have provided a lengthy article on the valuation methods used by the finance house Raymond James for InterOil. We can now speculatively update that. 

Basically, what RJ’s valuation amounts to is that it took

  • The mid point of the estimated deliverable amount of gas as being 6.9Tcf (the range is 2.5-11.3Tcf)
  • Valued this at $0.75 per 1000cf
  • risked it at 50% and deduct third party stake
  • applied a cashflow discount of 10%

At the time of this exercise, almost two years ago, gas prices were at $4 in Asia, now, these are close to $20, basically, these have quadrupled.

Raymond James has not reflected these increases in it’s valuation exercise, but since the interest in LNG is growing along with the price rises (or rather, the latter are a reflection of the former, of course) there are deals that put prices on gas reserves. Here is one, from Bloomberg:

Petronas yesterday agreed to pay A$4.91 a gigajoule for proven and probable coal seam gas reserves from Adelaide-based Santos, which Santos Acting Chief Executive David Knox said sets “a new benchmark” for reserves valuations.

Now, 4.91 Australian dollars work out to be 4.32 US dollars, but how much is a gigajoule? Basically, it’s just over a thousand cubic feet (1110cf, if you must know).

Taking the 6.9Tcf, the midpoint of the recoverable reserve estimate after Elk2 (which is likely to be increased because Antelope reserves will be added, and Antelope is a lot bigger than Elk), this amounts to 6.9×1.1×4.32=$32.78Billion. That’s like a lot of upside..

There are some points to take into consideration:

  • we have to deduct third party stake (35-50%, depending on a deal they might have with interested parties, a deal which itself will put market based numbers on the gas reserves)
  • the Santos reserves include proved and probable reserves, we do not have an equal number for Elk/Antelope, however, we’re getting a lot closer with the upcoming independent assessment of Netherland Sewell
  • coal seam gas might very well be more difficult and expensive to develop
  • these coal seam gas projects also need the development of LNG projects (there are no less than five planned in the regio)
  • RJ doesn’t include any value for the other 40 promising drilling sites, nor for a possible oil leg, or other liquids and condensates (the latter are present in high quality at both Elk and Antelope).

If risked, the RJ valuation amounts to 37.5 cents. I think we can say, now InterOil probably has a second, even larger gas field, that this is a conservative valuation when other gas fields in the area are selling at more than ten times that value.

This risk factor of 50% is the first that will disappear if a positive third party report from Netherlands Sewell comes out. But we also expect an upwards revision to the 75 cents value per Mcf (1000cf), from the same Bloomberg article:

BG wanted Origin’s gas resources to feed a project supplying liquefied natural gas, the fastest-growing energy market, to buyers in northern Asia where prices are almost double the U.S. benchmark.

As we argued numerous times already here, LNG is hot, especially in Asia. RJ has yet to reflect that in it’s valuation.

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