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Some comments on the Morgan Stanley’s upgrade report

October 28th, 2009 · No Comments

From our favourite petroleum engineer..

Comments on Today’s Morgan Stanley Report

As you are no doubt aware, Morgan Stanley is out today with an up grade of their previous rating. They have upgraded their base case price target from $67/sh to $73/sh. This increase was mainly based on their increase of the NGL’s to 120 million barrels, based on the Antelope 2 test, and assuming the facility is “project financed”. Base case uses the Knowledge Reservoir reserve estimate of 6.7 TCF for the gas. However, both the liquids and the gas are risked at 80% so the numbers used to arrive at the target price are 96 million barrels and 5.36 TCF. They arrive at a NAV of $91.26/sh but discount that by 20% to arrive at the final target of $73/Sh .

For the Bull case they stick with the 120 million barrels of NGL’s but increase the gas reserves to 8 TCF, both risked at 90% so the numbers they use to arrive at the expected Bull case price target of $142/Sh are 108 million barrels and 7.2 TCF. Also included in the Bull case is 100 million of recoverable oil risked at 90% (90 million barrels). They also included a value for the Exploration acreage of $500 million risked at 50% ($250 million) or $5.88/sh net contribution to the Bull case price target. They arrive at a NAV of $177/Sh but discount that by 20% to arrive at the final Bull case target price of $142/Sh .

As you can see, one could make the case that these are conservative estimations based on the risk factors and discount factors included.

Morgan Stanley’s schedule of expected forward events are:

  1. Full well test in Mid-November. I assume this is the full flow test of the +/- 2000 foot gas column up 7” tubing.
  2. A test of the NGL zone in late November. I do not know if they plan to set the 7” liner above the gas/oil contact in order to test some of the lower gas zones in the open hole below the 7” before drilling the oil zone or if they will leave some of the gas zones open below the 7” liner to be tested simultaneously with the oil zone. They may need to leave a little of the lower gas zone open below the 7” liner in order to have enough vertical distance to make the turn for the horizontal hole(s).
  3. Results from horizontal drilling (oil) in mid-December.

A couple of quotes that might be of concern to some are:

  1. “the NGL stripping monetization could precede an upstream interest sell-down and LNG partnership. An NGL stripping project could commence before the upstream interest is sold and would enhance the value of that interest.”
  2. “IOC intends to fully understand the extent of the NGL and oil before entering an upstream sale agreement.”

Since the Stripping plant is not expected to be in operation before 2012 this may be the first hint that the planned upstream assets sales may not be completed by year end as has been previously mentioned. They did say “We continue to expect the sell-down in 1H2010. I don’t see how they can have it both ways.

As for myself, I believe if they find commercial oil there will not be a stripping plant but the field gas treating plant and compressor station will be built as a part of the gas transportation and LNG plant project.

I hope that was helpful to you.

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We would say, sure, very helpful. Keep it up. In fact, he immediately obliged..

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