bongo project analysis

Bongo Project

First I will explain a couple of oil and gas terminologies essential for understanding how, generally, oil and gas financial analysis is done (given a certain information set). So lets start of with proven, probable, and possible reserves. Denotations of the following are given to explain each of the three types of reserves:

1P = Proven Reserves (they definitely know whats down there)
2P = Total Proven Reserves + Probable reserves (Probable is they are at least 50% confident the specified amount of reserves are down there)

3P = Possible Reserves (They arent sure about anything down there but it is possible, they are at least 10% sure)

P90 = Proven (1P)

P50 = Proven + Probable (2P)

P10= Possible (3P)

There was a clear mistake in the announcement stating:
Current P50 reserve estimates of the Bongo Prospect is 108 billion cubic feet (BCF) with upside (P90) of up to a total of 250 Bcf of gas

It should have been P10 not P90 as P90 would mean that they are 90% sure there is 250Bcf of gas. This is definitely a mistake because how can they be 90% sure there is 250Bcf and only 50% sure that there is 108Bcf.

Moving on, the Henery Hub selling (spot) price of Natural Gas is currently, via Bloomberg, $4.46/MMBTU. BTU stands for British Thermal Units and is a measure for energy.

TABLE:

1MCF of gas = 1000 cubic feet = 1MMBTU
1MMCF of gas = 1,000,000 cubic feet = 1000 MMBTU
1BCF of gas = 1,000,000,000 cubic feet = 1,000,000 MMBTU

Lastly, 1foot = 0.3048 meters

My analysis of the Bongo Project is as follows and is based on P50 reserve estimate of 108 Bcf of gas. My analysis does not account for taxation purposes.

108 Bcf = 108,000,000 MMBTU
$4.46 x 108,000,000 MMBTU = 481,680,000
481,680,000 x 9.375% (VILs interest) = operating profit before expenses of $46,963,800

Costs:

1. Funding =$1.1 million

$1.1 million (provided by Minc Stockbroking) will pay for lease acquisition ($885,000), drilling and testing costs (expected to cost $240,000)

Generally drilling costs cost between $350-$400 per meter and with the well drilling depth being 16,000 feet that is 4876.8 meters (0.3048 x 16,000ft). Using my estimate I am assuming drilling costs are 400 dollars per meter, where VILs share of 9.374% of the drilling costs will be $182,880; thus I calculate drilling costs without testing will cost $182,800. As VIL assume drilling plus testing costs will roughly be 240,000 then that means mathematically testing costs will be $57,200 ($240,000-$182,800).

2. Corporate Advisory

AIA will be receiving 4.6 million shares and I assume for my calculation that they will be awarded, the same as the Minc deal, for 2.2 cents per share. Therefore I calculate corporate advisory costs to be $4.6 million x 0.022 = $101,200.

Therefore total costs without administration (management) (discussed later) will be:
Funding of $1.1 million and,
Corporate advisory of $101,200
Total costs = $1,201,200

Thus total profit before administration expenses is $45,762,600 ($46,963,800 - $101,200)

I am accounting for admin expenses being 10% of total profit; thus,
$45,762,600 x 10% = $4,576,260

Net profit = $45,762,600-$4,576,260
= $41,178,240

Now how does the equity effect come into play?
Current ordinary holdings (12/02/2010 announcement 3B) = 631 million
Mincs entitlement = 50 million shares
AIAs (advisory) = 4.6 million shares
Net equity position = 685.6 million ordinary VIL shares.

So what is the value per share of Bongo?

Value per share = Net profit/ ordinary equity
= $41,178,240/ 685,600,000
= 0.06006161 = 6 cents per share

Therefore it can be said that the Bongo project does add significant value to VIL being worth 6 cents per share. Last share price traded was 2.9 cents which means that with Bongo alone the VIL share price is undervalued. Drilling commences in 3 weeks, lets see what happens. It is going to be a big month and a half for VIL holders. I am excited and I hope you are to!