People who are long the stock will see signs of a bigger reservoir in E/A while people who are short will see the opposite. While I believe IOC provides a much better risk / reward at these levels, let me play devil's advocate to your thinking.
1) OSH involvement does not guarantee that gas will be sold to the current LNG facility.
2) If Total was so confident , why would they lay off 30% of their risk? Why not keep the whole 61.3% (net 47.5%), drill some more and then sell down some of their position?
One last point. The fact that the first variable payment tranche, to 5.4 TCF, is paid at FID, while additional variable payments are paid at confirmation leads me to believe that TOT does not believe the final resource will be much greater than 5.4 TCF. That's just my opinion based on being in the deal business for 16 years.
Every now and again even a blind squirrel finds a nut. For Pickboone, no such luck.
For a year and a half, he would pop up with his ecstatic sources with great body language suggesting the deal was imminent and the stock would double within a few weeks or a month. And then, when the deal finally hits, well no one had heard from the guy for a month and a half.
Of course the deal was with Total, not Shell or XOM, which were his favorite flavors. And to make matters worse, after hearing the deal he hyped it as a sure double for the stock, even as it was tanking pre-market, only to watch it fall 37% for the day.
I certainly hope that as he pursues his new career as a waiter, I don't have the circumstance of his waiting on me, because I am sure the order will be wrong.
Just to clarify, the $700 million is the Resource Payment from 3.5 tcf to 5.4 tcf, and it is due at FID.
And while it is certainly possible that E/A is as big or bigger than IOC claims, one would have to believe that a bunch of keystone cops found one of the most prolific gas fields in the last 30 years. The market doesn't believe that, and the terms of the deal suggest to me that neither does Total. If the market truly believed the find, a) this deal would have been don a long time ago, and b) the stock wouldn't have lost 37% yesterday.
Use .475 instead of .613. The gas prices you used are for the implied value after PNG takes it stake, which reduced Total to 47.5% from 61.3%.
Or you could leave he .613 and replace .77 with .6 and 1.03 with .8.
Hope this helps.
Your continued pumping in the face of a nearly 40% decline is ridiculous. It was NOT short manipulation. It was longs bailing. And while the risk / reward on the long side is probably not bad at this point, the fact is the deal was announced and the stock got hammered and all you pumpers were WRONG.
Further, your analysis misses several key points:
1) $700 million of the resource payment, assuming your conjecture about the final agreed size of the field, is not paid until FID, which is probably 3 years out.
2) You don't take into account payouts to the IPI holders. They've been in for 10 years. They are not walking away for nothing.
3) Even if your analysis on the 2C reserves is correct, there is a Final Resource Payment based on actual 2P reserves. If the GLJ numbers are wrong and the 2P reserves are less than the 2C reserves, IOC has to pay back to Total the difference.
4) Going with TOT on a new LNG plant pushes real production out until 2020 at the earliest, which drastically alters the cash flow stream and NPV and introduces significantly more risk. There is a ton of LNG coming onto the market over the next several years. Plus IOC will be forced to redeploy cash into the business as opposed to the money flowing to shareholders.
5) Finally, and most importantly, there is no question that the terms of the deal introduced uncertainty as to the actual size of the field. All the valuation metrics for the company were base on the nearly 10 tcf that IOC has claimed since 2009. Maybe it really is a 10 tcf field, though I have my doubts, but Total just told the market it doesn't believe the field is that big, and so did everyone else for that matter.
I don't know if I qualify as a short, since I was only short delta through a ratio call spread that actually worked quite well if IOC rallied, as long as the stock stayed below 160. However, if I was short, I would have covered today, because in the 50's the stock is probably not trading too far above intrinsic value.
However, the announcement that would have made me anxious would have included a real validation of the total resource. The point I have argued on this board is that the 10 tcf number was not real. In my opinion, both the original XOM structure and the TOT deal today indicate that neither do they. Of course time will tell, but I find it curious that the payment for the gas up to 5.4 tcf is made on FID, while additional gas is paid on confirmation. If TOT believed that gas was there, I doubt that's how they would have structured the payments. And this view of the size of the field is corroborated by Total's press release, in which the aggregate payments they estimated would imply a field substantially below the 10 tcf level.
IOC closed at 76.81. So while the S&P 500 gained more than 50% in that time, IOC has lost nearly 28%. So while the stock might actually offer a more reasonable risk / return at this point, all the touts, pumpers and longs who have been hanging on this deal, all the while criticizing anyone who dared question valuation, were wrong. Period.
From Section 3.6 of the SPA, regarding Final Resource Payment:
(b) If the Final Resource Payment is:
(i) greater than the Interim Resource Payment (without deducting any amounts paid by the Buyer under clause 3.8), then the Buyer must pay an amount equal to the Final Resource Payment minus the Interim Resource Payment (without deducting any amounts paid by the Buyer under clause 3.8) to the Seller; or
(ii) less than the Interim Resource Payment (without deducting any amounts paid by the Buyer under clause 3.8), then the Seller must pay an amount equal to the Interim Resource Payment (without deducting any amounts paid by the Buyer under clause 3.8) minus the Final Resource Payment to the Buyer.
The Final Resource Payment is based on 2P reserves, not 2C reserves, so until IOC can fully move these reserves from contingent to proven and probable that liability will be hanging over them.
I guess many of you have never seen a bogus earn out in a purchase and sale before. It makes the headline look good, but everyone knows it will never be paid. The final certification will likely be not much more than the 5.4 tcf, if that much. Why else would that first additional tranche be paid only at FID, while additional tranches are paid at certification? It's the same reason XOM initially gave IOC the option to do what it wanted with gas above 4.6 tcf. Neither XOM or TOT believe the resource is what IOC has been claiming since 2009. That is why the deal took so long, and that is why the stock got pounded today.
Looks like the numbers in IOC are estimating total lifetime value of the deal to IOC, not Total's payments. We'll find out soon enough.
Pick, you can't even get the story straight when it is real, let alone all of your made up BS. IOC said between $1.5 billion and $3.6 billion depending on the size of the fields as confirmed by up to 3 delineation wells and certified by two firms, with completion expected in 2015. There is no guarantee that a re-certification will confirm 9 tcf of resource, and there is no mention whatsoever that the payment will be immediate.
The cynical side of me says it's to let the big boys out into a spike at the open before potentially less positive aspects of the deal come out, such as if the balance of payments aren't made until gas is flowing.
Owner Name Date Shared Held Change (Shares) Change(%) Value(in 1,000s)
PAULSON & CO INC 09/30/2013 1,191,472 (544,228) (31.36) 105,421
Except that on the last conference call, Hession explicitly states that they are not working on a 2nd LNG project, and the company took an accounting charge because of it.