Very careful, very educated, nothing improper said. Wayne Andrews is a class act and he gave the undercover shorts a few lessons that they only discard at their peril… If you’re considering to invest in this stock there are few better places to start than read this ‘undercover’ interview..
A summary below [with our comments in brackets] (or read the whole thing here) The items are preceded by the page number.
2) WAYNE ANDREWS: A drill stem test is they have open rock sides on the walls of the wall bore and you try to set a packer so you can isolate what’s below. You test just a certain section of the wall bore. That really hasn’t worked well for us because the rock is very porous and as soon as you set a packer, the pressure goes around the packer through the pore space and eventually eats away a channel so that you really can’t isolate the zone that you’re testing, but they do a set casing and we’ve just done that and we should have more drilling results here probably next week. I think it’s the best way to test a wall bore. It’s the only way, in fact, to test the wall bore. [Nice explanation of the well problems, even nicer to read that the rock is VERY POROUS!!]
2) WAYNE ANDREWS: Right. I would tell you I think it is progressing very well. One of the first things that we needed to do was have the resources to backstop an LNG project. We crossed that threshold when we announced our year-end results and had our first outside reservoir engineer, Hercardy(?) (4:21) and that information’s included in the presentation. It might be worthwhile just to take a quick look at that. I think it’s on page 30.
3) WAYNE ANDREWS: Proceed with one of these projects, we’re looking at, it’s the gross amount, our net. We have 55.67% of the gross volumes. You have to have at the C2 estimate, a number that’s a little 2.5 to 3 TCS. We crossed that threshold with our yearend report. So now we’ve got enough gas for a project. I would tell you that our gas is also very low cost. We have not spent a huge amount of money and we really haven’t detailed exactly what it costs us to find it. We are in the process of negotiating with partners and they realize what it’s worth, but it’s still, you know, you hate to rub it in their face. [Enough gas, low cost, and it won’t be monetized, according to the shorts, that’s quite funny…]
3) WAYNE ANDREWS: Because we did not, you know, if you could look back over our corporate financials and look how much money we’ve put into oil and gas exploration over the last four or five years, which will pretty much get you to what our cost basis is in these reserves and we’ve (unintelligible-5:40) less than 10 cents (unintelligible). We have very high productivity wells. We’ve got the land ready to go to build the LNG plant. We own, we have a 99-year lease on the former Australian Naval Base in Papua New Guinea because so have no landowner rights issues, nothing that’s stopping us. We have a jetty system there. We own the harbor rights. We’ve got a deep-water forest. We’re taking tankers now to bring crude oil into our refinery. All that’s ready to go with low cost gas. We’ve hired investment bankers, one ABNN Road. It was recently barred by RBS and we also have BNP Paramount. We are devising its own transactions. We’re finalizing an information memorandum on the project right now. We’ve, Bill, our CEO, has been meeting with potential investors in this project probably for the last 18 months. Many of them wanted to see this number before we were ready to move ahead.
6) WAYNE ANDREWS: That’s the game plan. That’s why I came to the company because let’s try to put some perspective on valuation. Exxon has a project where they also are taking gas, these gas fields, and they’re going to build a pipeline all the way down here to an area near Port Moresby where they’ve already bought land and they want to build an LNG project. There was a partner that owned some of the resources and part of the plant and they sold their interest to Nippon, a Japanese firm in December when oil prices were $35 a barrel and they got $800 million for 3.6% interest. I think our project is better than Exxon’s. It’s better because we’ve got all the infrastructure. Our wells here are averaging about one-third the cost. They’re drilling wells for $75 to $100 million. Our wells are costing between $25 and $40 million. The initial productivity of our wells is several hundred million cubic feet a day. Up here, they’re in the 8 to 15 million cubic foot a day range. So we’re 20 times more productive at one-third the cost, 60-fold improvement in economics versus drilling in this sandstone reservoir up here versus the limestone that we’ve discovered here. So our project is low cost. I told you the gas is low cost. We’ve got the place to build the plant. Off-the-shelf technology, very simple project and we’ve had an overwhelming amount of interest in it and if we could achieve, you know, if you calculate what the valuation is based on the sale, 3.6%, that values our interest something in the $10 billion range and we’re a 1.3 billion market cap company site. [We knew they had a cheap resource, but this REALLY puts it into perspective..]
6) WAYNE ANDREWS: You know, if somebody, if the company involved in capital markets today, I’m probably not supposed to tell you what I think the share price can do, but I can tell you when I was an analyst, I covered the stock. I would talk to portfolio managers and used to tell them I believe that this is a several hundred dollar stock in the next three to five years.
7) WAYNE ANDREWS: What’s holding it back and I would tell you that the answer to that question is (1) we’re not Exxon. We’re a very, you know, a fairly small company. We want, we plan to build an LNG plant that’s going to cost several billion dollars in investments. Where are you going to several billion dollars to build the plant. So even though you found natural gas, you’re still stranded until you have a plan to develop it and some people just don’t believe we’ll ever get that done.
7-8) WAYNE ANDREWS: I, I, I agree with that and we said maybe it’s just one or two additional new shareholders and we have some institutional investors now that have been accumulating the shares. That’s partly one of the reasons why things have moved up and our short interest is down substantially and I’ll tell you why. We have an $80 million convertible (unintelligible-20:36—sounds like “deventure”) that would and owners of that deventure(?) were naturally brought to the short stock because they’re going to be able to convert and very soon because if we traded over $32.50 for seven more days, we could force convert those deventures(?) into common shares. They would receive the common shares against their current short position and they’ve been hedged while they gone to convert. That takes about 3 million of the short interest off the market. If you look on our, the last short interest before (unintelligible-21:15) was about 4.8 million shares down from over 12, right? So I think getting the reservoir engineering reports out, the year-end results were okay considering the meltdown and we had an inventory adjustment that impacted our numbers, but the first quarter looks good and the results on the well, this Antelope well have also been very encouraging. I think that’s reduced the short interest. [Most of the shorts are related to the debentures..]
8) WAYNE ANDREWS: Another reason why I know that it’s down is that when it was heavily shorted, there was a borrower of the shares to short. Like you have to borrow and they pay you a fee to borrow your shares. That fee on an annual basis got as high as over 40% on an annual basis. They pay every day, borrow your shares to short. I talked to a guy the other day who was loaning his shares at 6% and they just reduced to 3%, which tells me that there’s not as much desire anymore for short shares, but there still is. You’re absolutely right. There’s probably 1.8 million shares that are short on the natural short. [Those real shorts are screaming, not only way down on their positions, consider the interest rate cost.. No wonder they hire ex-cons to try to bring it down..]
9) WAYNE ANDREWS: I agree with you. I agree with you. I mean we had a comparable transaction for $800 million at 3.6%. We’re looking to sell 20% interest in our project from the resources, the LNG plant, sign the LNG offer agreements and we’ve got China said they’re interested probably. India has said they’re interested probably. Japanese have been interested. We have Europeans coming to us because Putin shut down the pipeline to Europe this winter so they’re all scrambling to secure additional supplies from Italy, Spain and a number of other European countries. The interest level is very high and I’m absolutely convinced that we’re going to get a transaction to close this year and then the game is over after that because we’ll have more capital than we’ve ever had in our history that can really get moving on the next five-year term on these licenses.
9) WAYNE ANDREWS: And it’s being used to do work at Antelope and we could use the workover rig to do. As soon as we’re done drilling the well, we should take our special purpose, our portable rig, move it to another exploration prospect and put a workover rig there that can do all the work that we’ve done since say mid-January. We could have drilled Antelope too already if we had a workover rig. Workover rig’s like $5 million. We’re looking at a few. We want to buy one. We looked at a rig a year ago, another rig a year ago, $30 million (waiter talking—order being delivered.)
10) WAYNE ANDREWS: But it is a big field. Several, 15 miles long and like 6 miles wide. So it’s still a big field, but what’s of particular interest to us is what is the composition of the hydrocarbons lower in the reservoir. When we flow the well, all the flow comes from up here because it’s so porous. We’ve been trying to isolate zones in the well bore down here with packers that I told you about, right? Then we just have not been able to get a good test although we’ve seen encouraging increases in condensate. Condensate is essentially a light sweet crude oil. It’s very hot. It’s almost like a natural gasoline. Where we are today is we sampled in the first side track that we did, we did a test down in this zone right in through here, that black area, we tested oil there. We tested oil. We were seven feet from the old wall bore that we have cemented in, cemented it, drilled the side track. We’re seven feet away. We’ve pumped a huge amount of water into the well while we’re drilling it. So if it was contaminated right near the wall bore. We just drilled another side track. Now we’ve over, I think we’re 100 over 100 feet away from the old wall bore and it should be uncontaminated rock. We tested this zone right here with drill stem tests. We saw surges of condensate as high as 25 and as high as 100 barrels per million cubic feet in our last test. They didn’t last very long because, like I said, the channel behind the packer and all that gas from up here came around. So we’ve cemented a liner, a casing, right down to this point right here and we can perforate this zone and retest it, but what we’re doing today and maybe even tomorrow is drilling from outside that liner into this zone where we tested oil a couple weeks ago in the first side track. [The importance of condensates and they DID find oil…]
11) WAYNE ANDREWS: The next test is now, now instead of what we did is, this is the wall bore, we cemented up to here and we go down with a bit and we drilled like, you know, right off the old wall bore. We’re seven feet away. This next test that we did, we side tracked up here, built to angle and came down through way far away from the old wall bore and we pumped cement in here so it’s cemented out into the formation and there was a lot of water all around this whole area and we still were able to test there. Now, we’re out here. We’re right above that oil zone with a steel tube all the way to the surface. We could set a packer and just test that lower section. That’s what we’re going to do right in the next, probably in the next week. [The second side track will be better, not contaminated and now isolated..]
13) WAYNE ANDREWS: So I think it’s, you know, damaged the credibility. One of the things damaged the credibility is the short story and one of the reasons why, I don’t spent a lot of time battling that effort just because it’s poorly informed. People that are short in this stock don’t have any idea what’s actually going on. [We’ve been arguing that for some time…]
13) WAYNE ANDREWS: Because I read the stuff that they write and I hear the things that they say and I don’t argue against them because they do themselves a disservice by not having an understanding of what the company’s about and it’s clear when you read the stuff that they write, they just have no idea what’s really going on here.
14) WAYNE ANDREWS: One, it’s hard because I really can’t be definitive on the timing and the information flow that we have here, as soon as we have information that’s meaningful and potentially market moving, we release it instantly. We release it instantly because we have to. We can’t sit on any information. If something happens out at the well, there’s the service hands. There are a lot of people there. We can’t contain it. We have to announce it immediately. So we might have results from this testing, now that we’ve set cases, I really think this is the first time we’re really going to get a definitive test on the amount of condensate or NCF (?)(38:52) in the gas at the bottom and whether or not we have oil there. We should know that, we could know that as soon as tomorrow or as late as a week or two. [Again, things that we argued before, info is leaking and it’s very hard to contain for them. Note also that Wayne is very ethical on this..]
15) TERRY GILL: Um, you know, it’s just a real easy say as I said to say somebody buy it for 36 and it will be worth 200.
WAYNE ANDREWS: Right.
TERRY GILL: That’s, that’s a no-brainer.
WAYNE ANDREWS: You know, I wouldn’t tell you something like that if I didn’t believe it myself and I wouldn’t have left Raymond James where I had a very nice career to go to work for a company that I didn’t believe in. It wouldn’t make any sense for me to do that.
16) WAYNE ANDREWS: I’ve never seen a gas and condensate reservoir where that was not the case. So we tested 13 barrels per million up at the top, 2000 feet above where we are today. We expect there to be much richer condensate and it’s not like we’re hoping to find that. It’s natural that we should find that and that condensate richness or condensate ratio is not factored into our reserve report. The condensate itself could be worth more than all the gas and if we find that we can actually flow any kind of meaningful barrels of crude oil, that helps as well, but the condensate could drive all the economics for this project without and the gas would kind of get (unintelligible-42:48). So what we’re, what I’m suggesting is you said well maybe, you know, you will have an idea that things are going well. Well, I can tell you I think things are going well and I think we’re going to get a good test here and not just because, not just because I’m wishful or hoping for it. I think it’s natural and it should happen and it will be meaningful and you should, the best way to test it is doing exactly what we’ve just done, set casing, announce that that’s done and literally you should be growing this any day. [Condensate ratio goes up with depth…]
17) WAYNE ANDREWS: I’m glad, glad to help you. You know, just need to be aware that, of course, I can’t talk to you about anything that’s non-public information and I rarely have any non-public material information for more than a few seconds logged right in the press release right? That’s it. So, you know, I might not be able to help you in a way, you know, it sounds like you’re suggesting. I could just keep you up to date on the progress things that we’re doing, but it’s really, I’m restricted in what I’m allowed to discuss.
18) WAYNE ANDREWS: Yeah, but they don’t get much out of me because I want to stay out of jail, you know, and I’m relatively new on this job so I’m thinking about the best interests of the company for the long term and we do have a number of institutional guys that have been working on and another thing I’m looking for too is new research coverage and I expect to have new research coverage coming out during the course of this year. I’ve been meeting with my all the guys that my colleagues from the research business that I’ve known. I know everybody that writes research on oil and gas companies so I get to go visit them and I get a pretty warm reception and to tell the story. [New research coming!]
19) WAYNE ANDREWS: There will be a timeline with bids, preliminary bids need to be in. We will take the top five winners out of that process probably around the June, July timeframe and enter into final negotiations that I think will be completed during the third quarter, maybe I would expect during the third quarter.
19) WAYNE ANDREWS: Well I’ll tell you one thing though. We’ve got a, we’ve got some great advantages over our competitors. This river right here that you can barely see is a navigable river. [We know someone who spends his days arguing the opposite and uses 80 ID’s to do that. Who would you rather believe…]
20) WAYNE ANDREWS: And they wanted to build a pipeline to Australia which was, I always thought it was crazy.
TERRY GILL: Yeah that’s got to be several thousand miles isn’t it?
WAYNE ANDREWS: Yes. It was a several billion dollar pipeline and the price of gas in Australia is about $2 an mcf. You can sell it to the Chinese for 10 or 15.
21) TERRY GILL: Now, again, just an idol curiosity question. What geographic elevation are you at?
WAYNE ANDREWS: A little over 1000 feet. Very pretty simple, moderate, I’d say moderate terrain down to the coastline. We’re about I think 90 kilometers from the coast and then pretty central shallow water coastline, very easy pipeline build down to.
22) WAYNE ANDREWS: Yeah, see here’s where we are. I mean, it’s kind of more like foothills, rolling hills. It’s not as bad as it looks. There are a few other photographs of the area, of the rig. Now you can see there are some ridges, but it’s nothing like the highland where Exxon’s operating.
TERRY GILL: Well that’s got to add immeasurably to their costs.
WAYNE ANDREWS: Oh, it does.
25) WAYNE ANDREWS: We’ve had some issues with Merrill Lynch.
TERRY GILL: I’ve read about those.
WAYNE ANDREWS: The things did not go very (unintelligible). They were good partners for us when they were going to guarantee all the (unintelligible) so that we could get the project financed. That’s one thing that we didn’t talk about is that the market believes or some people think that we need to raise $6 billion to build a plant. Well, we only own half the plant right? We can build a single train for probably somewhere between 3 and 4 billion. We planned for 2, but once you have signed LNG off-take agreements with reputable parties to take the LNG, we can get the project financed, you can get 70% of the project financed, 30% equity. If we build two, so I use the larger number it’s 6 billion 30% equity, 1.8 billion. We’d be 50% of that or 900 million. If we sell half, it’s down to 450 million. We’re already contributing several hundred million dollars worth of infrastructure to reduce it even less that we sell 5% and get anything like what AGL got when they sold—-ends. [There goes the last short argument..]