Hi Par15,I still can't follow your reserves as they do not match...

Hi Par15,

I still can't follow your reserves as they do not match what the company has reported.

Your model still produces ~ 60 MMbbls, unchanged from your first pass. This error nearly triples the value of the company.

Mixing 2P and 3P reserves is dangerous and gives a highly optimistic forecast as does increasing the production rate without any statement that the company is has plans to do this.

In evaluating blue sky it would be appropriate to run a model with the stated company reserves and production forecast and then a separate model including your Galoc 3P reserves, Yakal and Tindalo reserves and production increases along with their respective capital costs. The difference between the two would clearly show the added value to the company of the high side assumptions. Investors could then make their own decisions about the value of the company based on a solid fundamental value and add the blue sky in with an appropriate risk factor.

As an alternative valuation model many analysts use values the company based on their certified reserves multiplied by a fixed dollar price per barrel in the ground. This can be adjusted for all things subjective like management quality, country risk etc. Upside can be included by using company estimations of OIIP assuming a recovery factor and attaching chance of success to the result. As the company’s exploration portfolio matures the chances of success can be increased.

I like this model as I can change some of my base assumptions easily and see where the next big move should take place. In the chart below I see that Gindarra is the where the next upside is and eagerly await the announcement of a farmin. Tindalo and Yakal I'm not so excited about but I expect the cash flow will keep the company afloat and provide capital for more of the shallow inboard exploration.