Hi Posters
On the quarterly report thread, Corporate asked me for some details regarding the Alice Springs powerhouse take or pay contract. Rather than post the response on that thread and have it get obscured by all of the other topics that are being discussed there, I thought it would be a good idea to devote my response to a separate thread. My motive is to enhance the level of our general knowledge and shareholders so that we are fortified for the long wait before our speculation immature as in two years time.
Some of you may remember that on the thread "Projected Revenue Looks Good" I spoke about the company having four revenue streams. The key to getting a grasp on the mysteries of the take or pay contract involves understanding the company's first two revenue streams. These are:
Stream No. 1 - Gas to Alice Springs Power - $6,665,000 pa. This is the contract between Northern Territory government and Magellan which we took over when we purchased Dingo. As a contract for the provision of gas to the Alice Springs powerhouse. This is the one that, I believe, is referred to in the recent quarterly report as the take or pay contract. The average annual supply under this contract is 1.55 PJ pa based on 31 petajoules total over 20 years.
Stream No. - 2 Gas to sales to Santos (formerly from Palm Valley) to service its customers on the pipeline between Alice Springs and Darwin - $6,345,000 pa. This is the contract between Magellan and STO which we took over when we purchased Palm Valley. The average annual supply under this contract is 1.66 PJ pa based on 31 petajoules total over 17 years.
Magellan was the original contract principal in both of those deals. In the case of stream 1 Magellan contracted with the Northern Territory government. In the case of stream 2 Magellan contracted with STO. We acquired both of those contracts from Magellan when we purchased Dingo and Palm Valley. So the key to understanding the contracts is to begin with commentary from Magellan.
The text that follows is the announcement that Magellan made on 12 September, 2013 when it was making public details of the transactions.
See Magellan announcement 12 September, 2013 as follows:
"DENVER, Sept. 12, 2013 /PRNewswire/ -- Magellan Petroleum Corporation ("Magellan" or the "Company") (NASDAQ: MPET) today announced that on September 12, 2013, the Company through its indirect subsidiary, Magellan Petroleum Corporation (NT) Pty Ltd ("MPNT"), signed a gas supply and purchase agreement (the "Dingo GSPA") with Northern Territory Power and Water Corporation ("PWC") for the long-term sale of gas from the Company's Dingo gas field. Pursuant to the Dingo GSPA, the Company has contracted to supply up to 31 PJ (30 Bcf) of gas to PWC on a 100% take-or-pay basis over a 20‑year supply period. The Company's supply obligation is expected to begin in early calendar year 2015 at a fixed price escalating with Australian CPI. The Dingo GSPA has been approved by the boards of directors of both PWC and Magellan. The Dingo GSPA is subject to certain customary conditions, including the Company successfully obtaining all regulatory approvals and constructing facilities necessary for commissioning the Dingo field for commercial gas production."
My comment: this is the Alice Springs powerhouse contract. Note the 6th line says that it is a "take or pay" basis. It is a virtuous document as our managing director would say. It starts on 1 April, 2015 (when we got the pipeline completed) and runs for 20 years. In rough figures it is a contract for the sale of 1.55 petajoules per annum. The price is not mentioned. There is no mention as to when and how billing and receipt will take place.
The Magellan announcement of 12 September, 2013 continues as follows:
"With this long term contract now in place, the Company will use the time before the commencement of gas supply to design, construct, and commission the surface facilities and tie-in pipeline necessary for the production and delivery of Dingo's gas. Currently, the Company is undertaking the front-end engineering and design ("FEED"), which is a continuation of work performed during the pre-FEED stage in fiscal year 2013, and which is expected to take approximately six months to complete. Gas volumes are expected to be produced from three wells drilled at Dingo in the 1980s and 1990s, two of which have since been temporarily shut-in, and which are expected to be capable of producing gas volumes sufficient to meet the delivery requirements under the Dingo GSPA. Concurrently with the FEED work, the Company will be applying for various regulatory approvals necessary for constructing the Dingo facilities and pipeline and commissioning Dingo for commercial gas production. The Company expects to receive all approvals by the summer of 2014 and intends to begin construction of the pipeline and facilities immediately thereafter.
"J. Thomas Wilson, President and CEO of Magellan, stated, "Contracting for the sale of a substantial portion of Dingo's gas resources is yet another milestone achieved in our strategy of proving up the value of the Company's assets. Dingo's reserves potential was established nearly 25 years ago through a four-well exploratory program, but, with no customer, the field has since been left dormant. We will work vigorously to achieve the regulatory approvals and commissioning of Dingo as quickly as possible, and we look forward to working once again with PWC, who has been a valued customer of Magellan at our Palm Valley gas field over the past three decades. "
My comment: In this the last paragraph of Magellan's announcement of 12 September, 2013 we find a reference to stream 2 as follows:
"We believe we have now achieved the key milestones of our strategy for our Amadeus Basin assets, onshore Australia: we completed an asset swap with Santos in September 2011 to consolidate our interests in Palm Valley and Dingo and received $25 million in cash, we contracted most of Palm Valley's remaining gas reserves to Santos in September 2011 under a long-term contract, and now we have contracted up to 30 Bcf of Dingo's gas reserves with PWC. Following on the Company's initiation of the CO2-EOR pilot program at Poplar announced on August 12, 2013, we remain focused on executing the other key milestones of our strategy to increase net asset value per share."
In the 3rd and 4th lines of the paragraph above, this announcement mentions the fact that there is a second contract which is a commitment to sell STO 31 petajoules total over a "long-term". The details of that transaction can be traced from the Magellan announcement of 31 May, 2012.
Here is the text of that announcement. The reference to our revenue stream 2 (now a contract between CTP and STO but formerly a contract between STO and Magellan) begins in the seventh line where it speaks of a 17 year gas sales contract with Santos.
See as follows:
"http://www.energy-pedia.com/news/australia/new-150535
"Source: Magellan Petroleum 31 May 2012
"Magellan Petroleum has announced the completion of its previously announced Australian asset swap with Santos. Under the terms of the agreement, Magellan has:
"Received A$25 million in net cash proceeds and expects to receive post-closing adjustments in an additional amount of approx. A$3 million within the next sixty days from Santos;
"Increased ownership to 100% in the Palm Valley and Dingo natural gas fields;
"Sold all of its interests in the Mereenie oil and natural gas field to Santos;
"Executed a 17-year gas sales contract with Santos for the sale of natural gas production in an amount of up to 23 Bcf from the Palm Valley field, which production volumes have in turn been sold by Santos to a sizeable mining customer in Australia; and
"Retained the opportunity to earn up to A$17.5 million in bonus payments based on Mereenie achieving certain production milestones over the next 20 years.
"As a result of the transaction’s completion, Magellan’s consolidated cash position has increased to approx. US$45 million, including expected post-closing adjustments. In addition, the 17-year contract for all of the currently existing Palm Valley field production is expected to increase Magellan’s total reported proved reserves by approximately 18 Bcf of natural gas (3 MMboe) as well as to generate approx. A$100 million in cumulative undiscounted revenue.
"The Company will now focus on marketing Dingo’s natural gas resources to the Australian mining industry. The Company will also undertake a review of Palm Valley in an attempt to determine if there exist additional undeveloped reserves in this field.
"'Completing our asset swap transaction with Santos is a transformational milestone for Magellan Petroleum and illustrates the continued execution of our turnaround strategy set in place last year,' said Tom Wilson, President and CEO of Magellan. 'In addition to enhancing a very strong balance sheet, the transaction completes our Australian asset rationalization effort and provides our company with a long term, stable cash flow resource with more operational and cost control. At the same time, a potential for upside from our Australian assets has been created based on the Mereenie field achieving certain production milestones, the development of our Dingo asset, and, longer-term, the results of the upcoming seismic survey of our Bonaparte Basin asset.'
"'The Australian mining industry is seeking alternatives to the costly diesel oil currently used in most mining operations,' continued Mr. Wilson. 'Palm Valley’s proximity to mining operations enabled Santos to enter into a long-term supply agreement and illustrates the current attractiveness of the Australian market for natural gas. Our goal is to directly enter into a similar agreement with a blue-chip mining customer for Dingo’s natural gas resources, and we are actively pursuing such negotiations.'
"Magellan also announced that the 3-D seismic survey for its 100% owned exploration block in the Bonaparte Basin, offshore Australia in the Timor Sea, is expected to be conducted in the Australian winter of 2012. The survey is designed to determine the existence, and, if so, the possible size, of a natural gas exploration prospect that existing 2-D data suggests is present on this block. "
My comments:
These are the two gas sales deals that we took over when we purchased Dingo and Palm Valley. Revenue stream 2 is gas that STO needed to buy to supply its miscellaneous commercial clients. The "sizeable mining customer" referred to is the McArthur River mine. It is not a take or pay contract.
Both of these contracts are very valuable. In effect both provide for annual sales of approximately 1.5 PJ per annum each. It is difficult to reliably put forward specific revenue expectations because the price of the gas is not revealed.
Nonetheless, you might recall that our managing director said that you can budget on 3 million per petajoule net revenue after costs. Taking that figure into account and looking at the quarterly reports figures for sales is possible to interpolate an approximate figure for these contracts.
My personal interpolation has been:
Stream No. 1 (Alice Springs powerhouse) - $6,665,000 pa
Stream No. 2 (STO's commercial customers) - $6,345,000 pa
I cannot be sure that these approximations are correct but in due course we will all be able to figure it out from year end figures which the company must publish sooner or later.
My figures get some support from a statement made to the annual general meeting of Magellan shareholders that took place in May 2013. The statement was as follows:
"With respect to our onshore Australian operations, our Palm Valley gas field and Dingo gas field are well positioned to provide the Company with significant stable and long-term cash flows in the relatively near term. Palm Valley is fully contracted and only awaiting a ramp-up in customer off-take volumes to achieve its maximum potential, which is expected to occur within eight to 12 months. After this ramp-up, the field will be selling gas at its full annual capacity of 1.4 Bcf. [My comment – this is a reference to revenue stream 2] At Dingo, a field which has been idle since the 1980s, we are focused on contracting out the field's gas reserves, and we expect to sign a gas supply agreement relatively soon. Once we have a firm customer, we can complete the engineering and construction of the Dingo pipeline and related facilities and be in a position to sell gas at or near full capacity in approximately 18 months. Together, if fully contracted, the Palm Valley and Dingo fields can provide the Company with up to $10 million of annual cash flow and in excess of $200 million in cumulative net cash flow (undiscounted) over the life of the assets. "
My comments:
The reference to $10 million annual cash flow in the second last line tends to support my approximation. Both contracts referred to in that statement are for similar volumes therefore it is reasonable to simply divide the $10,000,000 by 2 and come up with $5 million per annum each. On the basis of these statements from Magellan and the figures actually reported in the half yearly report for CTP and its recent quarterly report, it is safe to say that the $5 million has certainly been achieved and there may be a case to say that my figures in excess of $6 million could be correct.
I interpolated an assumed price per gigajoule on the basis of Magellan's reported figures gas prices it had achieved. Its annual reports, available from its website, disclosed that from Palm Valley Magellan achieved these prices: A$2.22/mcf in 2009, A$2.25/mcf in 2010, A$2.28/mcf in 2011, A$3.01/mcf in 2012, A$4.8mcf in 2013. Obviously the American Securities and Exchange Commission insist on shareholders being given more detailed information than we in Australia get.
In respect of stream No. 1 my interpolation was based on sales at the rate of 1.55 PJ/pa (the average) and at [my] interpolated price of $4-70/GJ unit sale value. Using those figures I assumed that the Dingo GSPA will yield the company average revenue of $6,665,000 annually (plus CPI escalations).
In respect of stream No.2 I interpolation was based on this data: The revenue figures that can be extracted from the CTP 2015 Annual Report and an assumption that sales to STO continued at the price received by Magellan immediately prior to CTP's takeover of Palm Valley ($4-70/GJ). On that basis I concluded that the company's revenue for this stream, over the next 14 years, will be in the order of $6,345,000 per annum. More probably, the 2011-12 contract between MPA and STO provides for market value escalation pegged to export prices. I do not have that information. Magellan 2013 Annual Report suggests that the figure for gross revenue under this sale contract to STO, will stabilise at approximately AUD $8.0 million per year (see page 17 "Gas sales volumes under this contract are expected to ramp up based on currently scheduled contracts to approximately 3.3 MMcf/d by the third quarter of fiscal year 2014 and to 4.1 MMcf/d [1.5 PJ/pa] by the fourth quarter of fiscal year 2015, at which point the field will be selling at its full deliverability capacity and generating revenues of approximately AUD $8.0 million per year.").
The specific question asked by Corporate – why do I say that the Alice Springs powerhouse revenue (stream 1) is only payable annually in January of each year?
My answer is that I have concluded as much based on this source information:
CTP Annual Report 23 Sep 2015 - page page 5 - take or pay revenue associated with the Dingo gas field ($2.2 million) is not payable by the Power and Water Corp until January 2016. Page 6 - [referring to the customer Power and Water of Alice Springs] "for the 3 months period following commencement of the GSA on 1 April, 2015, a total of 150 terajoules was sold from the Palm Valley gas field, with a total of 361 terajoules subject to Take or Pay arrangements. In accordance with [the agreement] revenue associated with Take or Pay during a calendar year is payable in January of the following year. For the current period, $2.2" million in take or pay revenue will become payable in January 2016 and has not therefore been recognised in this reporting period..." Page 7 - "... Even though take or pay revenue of $2.2 million that was generated to 30 June, 2015 was not recognised during the reporting period. This take or pay revenue is payable in January 2016 and will be accounted for in the financial year ending 2016..."
I hope this helps. GLTA
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