The deal disappointed because it pushed rewards into the future, but the investment merit remains, along with 2014 catalysts.
Q1 $613mm payment ($12.50/sh)
- 3 appraisal wells on PRL 15
- 1 exploration well on PRL 15
- 3 exploration wells (I each on each of PRL 236, 237 and 238)
IOC is carried by Total on the upfront cost for the PRL 15 wells with the cost of the 3 appraisal wells taken out of the resource payment. The result of these 3 will lead to jointly certified reserves, and a payment in 2015. IOC’s 3 examples are 5.4 / 6.5 / 9.9 CFE, which amounts to about $30 / $42 / $84 per IOC share.
Depends on how you personally assess the risk and prospects for the reserves, but it seems to me the downside case is probably the $42 / share (12.5+30), and drilling catalysts will either support or not the upside case of perhaps $95 / share. Splitting the difference, the cash payment to IOC in 2014/2015 would be about $69 / share, well exceeding the present market value of the company. And this does not include:
value of the retained interest in the plant
potential strikes on either 236/237/238
PRL 39 / Triceritops, which has already found gas.
The impatience with IOC is well earned, and most long term shareholders are frustrated, but it does seem to me that the value and catalysts are there for new shareholders to move this higher in the coming year.
If I've got this wrong, let me know
Combining your analyses (papaloapan and bonk), the "moderate" case is well stated.
Given the current mid-$50s stock price, there is both an upside and downside case, depending on future outcomes -- like with any stock.
The moderates will get neither too optimistic nor pessimistic without further verification, but recognize the risk vs. reward.
My stance is to take the risk at this point, believing that the probabilities favor the upside.
PS Where's my dividend? LOL
Sentiment: Strong Buy
VS, I suspect that you are right and the stock now has more medium term upside than downside potential. The only good thing about the past couple of weeks is that moderates are no longer attacked and berated by pumpers and mini-pumpers (small victories). They have learned a little more humility, even if they never display it. Funny how the know it alls at SHU are as baffled as everyone else. Have to admit, I do find bonk's daily posts a bit more obnoxious now...he is about as obnoxious as the pumpers were before the great fall (and his current "analysis" does not exactly have a ring of objectivity. He clearly is a man with a mission...as many have said, there is a reason he spends so much time here.
No; just trying to quantify what this complex deal means to me as a shareholder - my conjecture relates to how much cash they could receive, and I am not conjecturing on share price. However, as Bonk points out below, I have missed a few things, and the numbers are not as good as my draft.
Papa - I think your overall thinking process is the right one, but you are double-counting the $613M, and ignoring the IPI interest in the payments. E.g. at the 5.4 Tcfe level , the contingent resource payment is $698.7M in total (less appraisal cost adjustment) plus an FID payment ($112M) - IOC gets about 75.6% of this (assuming pass-thru economics to IPI) - so you are thinking IOC will get a check for $1.5 Billion ($30 per share), but in fact that check would only be about $600M ($12 per share). Of course IPI would get their share of the initial $613 also, so your downside scenario of $42 ($12.5+$30) is actually $9.25+$12 = about $21 per share. But IOC retains a 30% stake stock that adds about $10 (at Total's price/mcf) so a realistic view is in the low 30s at the 5.4 Tcfe level. I assume the other assets are a wash with the debt that IOC has already racked up (e.g. the $70 convert has to be paid off in 11 months, refinery mortgage, bridge loan, etc.
My math using a 100% chance of FID and a modest 10% discount rate is 5.4 Tcfe = $31 per share, 6.5 Tcfe = $43 per share, and 9.9 Tcfe = $87 per share. Of course Calio uses a "base case" of 9.9 Tcfe and gets an $85 target, and Westlake's downside is $30 so my math fits.
It's best to focus on what really matters - the deal is known and a huge piece of it is getting sold off, so the thing to focus on is what Tcfe number will come back at the recertification. Total thinks 5.4. IOC is putting on a brave face and hoping for more. Place your bets accordingly.
With the amount of misunderstanding of the deal and the delusional hopes for bidding wars in a few weeks my sense is some air still needs to come out of the stock as reality slowly creeps in.
I have some detailed queries into Total IR and will report back anything of interest, in the most objective and dispassionate way, as always.
Good analysis - it would be good if Kenny could insert his figures into your meodel and then comment on where he thinks it is wrong / short etc.
Then we would have 2 clear and maybe opposing modles on valuation to analyse and start to arrive at a view of the value.
Thanks Bonk - helpful clarifications. I fully agree the thing that counts here is the re-certification, and that the buyout talk is useless and delusional. My own expectation - and hope - is that the re-certification is going to come in the come in between the 6.5 - 9.9 numbers, but we'll see.