First post today ! I have been following the chat for several months now and I am very impressed by the quality of the contributions - thank you for sharing the knowledge, this is truly inspiring.
I guess many of us hope for a scenario that goes : WDS drills → Ghawar-2 announced → PCL gets taken over. Even in such an ideal scenario, I'm still not sure how I will assess the quality of a bid for the shares if it comes. Looking at the same old EurozHartleys table doesn't really cut it.
We know the decision tree after the first drill :
- option 1 : second well drilled, PCL pays for 20% of costs, keeps 20% share
- option 2 : second well drilled, no cost for PCL, holding reduced to 10%
- option 3 : second (and other) well(s) drilled, no cost for PCL, holdings now a 1.5% gross overriding revenue royalty interest
We can make a model for options 1 and 2 but at this stage, it's really going to be bullshit in / bullshit out... too much data missing. Option 3 is far more approachable and we can use it to figure out a floor, a minimum value to any bid. The real value for a buyer is in option 1, but at least it would be nice to be able to appreciate if a bid is truly ludicrous.
Of course, we need to assume the exploration well doesn't come back dry (duh !) and that there is "enough oil" to go to production. Since we want to find a floor price, the total volume doesn't matter that much - but it does, and preponderantly, for option 1.
The way I understand it, "gross overriding revenue royalty interest" means we simply receive 1.5% of any revenue at no cost (right ?). Let's consider, for the exercise, a 200 kbpd FPSO with first oil in 2029. We will look at cash flows for 20 years, using forward Brent prices (market rates for the first few years, then eroding prices for the back ends where there is no real paper market) and the zero-risk USD curve. An oil co wouldn't look at it this way (they would use target oil prices and a much higher IRR rate) but I feel the financial approach makes sense here. Highly debatable but gotta start somewhere...
I end up with a floor value of 11 cents per share (total prod 1.2 bn bbl)
If I add another FPSO, first oil 2031, I get 20 cents per share (total prod 2.2 bn bbl) :
So... what does that tell me ? That if everything goes right (big if !), even the worst option we hold seems to imply a 11-20 cents value. We do hold 20% (with costs sharing), however, so a reasonable bid should be substantially higher for the right oil co (or even a private equity co with deep pockets).
Of course all the above is probably as wrong as it gets - in any case full of assumptions and shortcuts so by all means DYOR, no advice here, I'm just sharing my dubious back-of-the-envelope calcs for the sake of the exercise...
Apologies for the long post - but what do you think of the reasoning ? Makes any sense ?
(20min delay)