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Some implications from the Conoco/Origin deal

September 22nd, 2008 · 7 Comments

We posted earlier on this deal for Origin’s coal seam gas in Nothern Australia. Now some stylized facts, and some calculations to arrive at valuations for InterOil.

Here are some stylized facts from the Conoco/Origin deal:

  • Conoco pays A$4 per GJ for P2 reserves, which is (4/1.05)x0.85= US$3.2385 per Mcf
  • Conoco pays A$1.88 per GJ for P3 reserves = US$1.5219 per Mcf

Can InterOil and Origin be compared?

  • Origin has reserves on the books, IOC doesn’t (but a third party agency is working on that right now)
  • Origin, in order to exploit these, needs to drill 20,500 (twenty thousand five hundred!) wells, and man them. IOC can supply 40% of it’s planned LNG facility with just two wells which already have been drilled
  • Labour cost are a fraction in PNG, and because IOC needs a fraction of the labour coal seam gas resources need, it can be concluded safely that IOC’s project will cost much less than any coal seam gas from Australia

What would InterOil’s resource be worth taking the same matrices as Origin (despite IOC’s obvious cost advantage), a couple of scenarios:

1) 10Tcf in P3 that’s $15B.

  • If the PNG government takes a stake (they have a right to 23.5% if they share their part in the finding and development cost), 53.05% will be InterOil’s, that’s $7.5B.
  • That’s $7.5B/40M = $187.5 per share

2) 2Tcf in P2 that’s $6.5B

  • IOC’s stake would be $3.25B
  • That’s $3.25B/40M = $81.25 per share

And remember the following:

  • Because of the large cost advantage, we fail to see how the valuation would be below that of Origin. In fact, it could very well be above
  • The resource estimation going on right now will only consider the output of the three wells drilled in Elk/Antelope so far. Any additional successful well will add to the numbers
  • The calculated share prices do not include anything for the refinery, retail business, the liquids and the 9M acres with 40 other promising drilling prospects (including a significant probability to find oil)

We can safely conclude that the upside for InterOil is very large, and with so many drilling opportunities left and the structural turn around in the refinery, we fail to see much, if any downside.

We would say, it’s a screaming buy.

Tags: IOC · Research Reports

7 responses so far ↓

  • 1 Harry Chamberlin // Sep 22, 2008 at 9:43 pm

    Nice article Stp. Makes alot of sense to me.

  • 2 Jim Tate // Sep 23, 2008 at 2:41 am

    Conoco paid more than 1/3 more than BG offer of $4.57 mcf.

  • 3 New Raymond James comment // Sep 24, 2008 at 10:15 pm

    […] were not aware of that Kogas deal, paying a whopping $20 per Mcf. We did comment extensively on the Conoco/Origin deal, and valuations for resource in the ground are also highly encouraging. […]

  • 4 Coal Seam Gas doesn’t seem so hot anymore // Oct 6, 2008 at 5:59 pm

    […] gas doesn’t flow naturally), and manned, in some cases in excess of 20,000 wells (as in the Conoco/Origin venture). Now that energy prices are coming down, this proposition doesn’t seem quite so good […]

  • 5 InterOil and OilSearch, some really interesting calculations — // Nov 5, 2008 at 5:39 pm

    […] Conoco/Origin ($3.24 per Mcf P2 and $1.53 per Mcf P3) […]

  • 6 InterOil: A lot more to come.. — // Apr 1, 2009 at 6:20 pm

    […] Conoco/Origin for $3.24 per Mcf P2 and $1.53 per Mcf P3 […]

  • 7 InterOil’s stock price gyrations — // Jun 23, 2009 at 12:27 am

    […] people of other deals in the region, which were valued at way higher prices than $1 per Mcf, like Conoco’s stake in Origin at $3.23 per Mcf. And that’s Australian coal seam gas, where thousands of wells have to be […]