another extension 9 days, page-36

I’m puzzled about the share price sitting in the low 40’s and now dropping a bit, but guess it is the average of expectations of those that think the takeover will go through with a price of $0.52 or better and those that think it won’t and thus see the share price resuming its lower trajectory.

Considering the likely buyer on the one hand:
I have thought for most of this year that the takeover is certain with Petrochina as the ultimate holder or puppet master. They showed their hand with their stake in LNG & protracted purchase of MPO (target production 65 tj/day). To make this investment work they need WCL gas. MPO + WCL fully developed will generate ~130 tj/day – enough to operate, at break even, half of a LNG LTD train at FL. But, to really fly with FL, they need another 1.5 trains worth of gas. LNG has booked enough existing pipeline capacity (Jemena) from Wullumbilla hub to supply the balance. As Shell is still back-peddling with Arrow, JV partner Petrochina may well supply some of their stranded gas on a tolling basis to LNG who would then have their problem solved and be ‘cooking with gas’. If so, this may leave MEL as an alternative supplier out in the cold.

Considering the competition:
I could never see any of the big 4 LNG export proponents buying WCL as they have all been trying to reduce their commercial exposure to Qld CSG based LNG projects because the have got indigestion in the development and start-up process. Project financing is clearly difficult for them at present.

Considering WCL on the other hand:
WCL don’t have anywhere near enough funds to develop production up to 65 tj/day. Looking at the cost of other CSG developments, I can’t see any change for $500 mil at the low end of cost and this could be significantly higher at the top end. Already WCL have eaten well into the $25 mil or so raised in the last twelve months.

One can get some idea that the development costs for WCL to reach sustainable production of 65 tj/day will be much greater than WCL’s current capacity - and I reckon the appetite of WCL’s principal shareholders - by referring to the numbers, not the rhetoric, in WCL’s quarterly reports, as follows. Total capital raised since inception has been about $152 mil and revenue about $13.4 mil from gas sales. Of the approx $168.5 mil in funds that have been available to management, there is about $30 mil left. They have used up about $134 mil of available funds so far. The rest is a bit blurry: with $45 mil going to acquire their exploration & production ground, including expenditure commitments; leaving about $89mil mostly covering developing and maintaining production of the Meridian field, with some ongoing exploration. However, having spent all this money they have only increased quarterly average daily field production levels since acquisition from 10.1 tj/day in the 3rd quarter of 2010 to 11.1 tj/day in the third quarter of 2012 – an increase of just 1.0 tj/day. To me that doesn’t look like the gold mine some shareholders and posters on HC think. The problem is that unconventional gas decline rates are significant and ongoing expenditure is required to maintain production. Getting up to 65tj/day is going to be very expensive the way WCL is going.

Knowing the above, I can’t see why WCL directors wouldn’t grab the opportunity to sell even if it is only $0.52/share. I’d be happy with a gain of about 50%.