meo valuation

I am on the road (not Ireland Mick but on the Northern Rivers scenic route around Byron) so it has been difficult put a post together.

Not that I am needed because, like longt says, there is an abundance of knowledgeable posters ready to bring stability to the MEO raft. Whether these are overly optimistic, obvious down rampers or genuine researchers, they all have their place because we all need to keep ourselves grounded and use all the tools available to make our own informed decisions.

A lot has been said about the history of MEO and its assets so is it possible to put a value on these assets at this point in time? The short plays on MEO go on, as usual, but can we put a reasonable true value on each MEO share (VPS)? For newbies I will explain how we can maybe estimate that value.

This is another long post so please bear with me or scroll down to see my final calculations at the end of the post.

Current Assets

The base cash assets of the company is ~$69m so 69/477.2=14.4593cps.

VPS Current assets = 14.5cps

Non-current assets

MEO is not only a company that is cashed up with funds to explore new ventures. We are also dynamically involved in exploring three prospective permits as operator. We also have government major development approval to proceed with the TSMP and TSLNG projects on Tassie shoal. I will look at these later but from the Annual report the value put on the exploration and evaluation costs is $124.2m. Some of these costs may be recoverable during the farmout processes so, to be reasonable, let's put the figure at 60% recoverable:

124.2 div 477.2 = 26cps

So @ 60% recoverable = 26 * 60% = 16cps

VPS reasonable value on non-current assets = 16cps

WA-360-P Artemis

Of course there always is the argument that any wildcat well can be dry. With the farmout to PBR we have already de-risked Artemis with a profit.

For the purposes of VPS we can estimate from existing data what the chances of success are. This is known as Geological Chance of Success (GCOS) or Possibility (Probability) of Success (POS). Initially this is from 2D/3D seismic data or comparison with other known wells in the area.

At the moment Artemis is purported to contain 20.3Tcf mean gas in place (GIP) with a recovery factor of 60%. MEO now have a 25% share in the permit.

To calculate the VPS of the gas we need to know the net profit (after costs) from the wellhead price. MEO have estimated this at 0.50c US. We now need to convert this (FX} into AU$ which is a figure always in flux. Once we know this value then we can divide it by the number of shares on offer. This will give us the unrisked value. For the risked value we must then multiply it by the percentage GCOS of that risk.

So the value of the mean estimate of 20.3 Tcf in Artemis is:

20.3Tcf (mean gas) x 60%(recovery factor) x 25% (MEO share) x US$0.50/mcf div 0.98 (fx) div 477.2m shares on offer = $3.26cps.

This gives us the unrisked VPS of Artemis at $3.26.

Because A#1 is a wildcat well then we need to work out the percentage GCOS (or POS). Once we have this then the $3.26 needs to be divided by the GCOS. MEO put this at 32%. With further data they have since been a bit more bullish, up to 50%. From an exercise I did last year averaging out the GCOS from two sources ie MEO and an independent report SRK did for Moby Oil. This factored in at 22% GCOS.

So using these figures we get:

50% GCOS of $3.26 = $1.63,
32% = $1.04,
22% = 0.72c

Of course we know that the downside of the GCOS is that there is always the risk of failure so a 32% GCOS gives us a 68% chance there is no gas. The GCOS is a subjective figure and no O&G lead is of any value until a resource is proven. This is why any investor without an appetite for risk is advised to stay away from speculative stocks.

For this exercise regarding Artemis I will stick to the rather conservative 22% GCOS so:

VPS Artemis to MEO = 0.72cps

NTP/68

We now have two separate entities in NTP/68. MEO have decided to retain 100% Blackwood as they probably see that the farm in partner for Heron and its LNG quality gas may not necessarily be interested in Methanol production.

This, in my mind is where the jigsaw (as depicted in the AR) comes into play. Tassie Shoal (TS) has two government approved projects, namely the Timor Sea LNG Project (TSLNG) and the Tassie Shoal Methanol Project (TSMP). Both of these are separate entities but will have a number of shared facilities such as supply vessels, control/accommodation deck etc. The estimated cost of the first Methanol Plant is US$1.25bn whilst the LNG plant is priced at US$2.0bn.

Between 10-15% CO2 by-product from the LNG production can also be stripped and used in the Methanol production eliminating the need for geo-sequestration or other carbon capture methods. This is a neat solution.

The Air Products LNG plant will support 3.0 - 3.7 Mtpa production whilst the TSMP project will consist of two 1.75 Mtpa methanol plants.

So, back to our valuation.

NTP/68 - Greater Heron

The farmout of NT/P68 has lessened the risk to the SP should A#1 prove to be a duster. Admittedly the SP will take a dive but will be cushioned by what comes out of the data room. Like other posters here I also believe there will be interest from major O&G players as hinted by management.

From the combined GCA/MEO report the mean prospective resource estimate is 5 Tcf. The GCOS is higher with Heron because we do know gas is there. Because of the problems with the Atlas drill we still need further testing to validate the discovery. For this reason I would put the GCOS a bit lower than Dr Daz at around 60% for the time being. The other figure we need is the remaining MEO interest in the permit after farm-in. I will put this at 50%. I have already accounted for any return for past costs in the non-current assets. I have also assumed that the 55% recovery factor has already been taken into account when reaching the 5Tcf figure.

So using the above formula we can look at the value of Heron to MEO:

5Tcf (mean gas) x 50% (MEO share) x US$0.50/mcf div 0.98 (fx) div 477.2m shares on offer = $2.67cps.

This gives us the unrisked VPS of Greater Heron at $2.67.

Using the two GCOS figures this will give us the risked value at:

Dr Daz (80%) - $2.67 x 80% = $2.14

Conservative (60%) - $2.67 x 60% = $1.60

VPS Greater Heron to MEO = $1.60cps

NTP/68 - Blackwood

MEO have stated that:

'The first methanol plant proposed for the Tassie Shoal Methanol Project (TSMP) requires approximately 1400 Bcf of raw gas (including inerts) to produce 1,750,000 tonnes per annum for 20 years of operation' and they expect that 'there may be 1700 Bcf of raw recoverable gas at Blackwood'.

MEO and their 50% partner Air Products have also been looking for third party gas to ensure a gas feed before commencing on the projects. This may not be far away with Magellan, the potential new operator of Evan's Shoal, talking with the permit partners regarding the future of the large but high in CO2, stranded gas field. Some of this gas could be the feed required to get the TSMP under way. This will suit Magellan who will be looking for early production and sale of gas whilst waiting for approval of a Darwin methanol plant.

So this part of the jigsaw could mean a combination of gas from Blackwood and Evans Shoal to guarantee supply to the TSMP. The logistics of how the partnership/funding of TSMP will be approached is beyond me but MEO could Farm out Blackwood to a larger company who would also be interested in a JV in the TSMP.

It is difficult to see how this will pan out but by way of this valuation let's keep things simple and treat the wellhead gas the same as Artemis and Heron. We can look again at a 50% residual interest after farmout:

1.7cf (mean gas) x 50% (MEO share) x US$0.50/mcf div 0.98 (fx) div 477.2m shares on offer = $0.91 cps.

This gives us the unrisked VPS of Greater Blackwood at $0.91c

As we know there is gas in Blackwood but is yet to be validated I will show the 60% & 80% GCOS multipliers to give us the risked VPS:

$0.91 x 80% = $0.73 or $0.91 x 60% = $0.55

VPS Blackwood to MEO = $0.55 cps

Conclusion

I was asked a while ago why Artemis was different to Zeus. The obvious reason is hopefully Artemis has gas. Another reason is that Zeus was drilled at the end of a number of cycles. NTP/68 was due for renewal, the Artemis data was still being compiled, the GFC was taking its toll on Major SHs affecting the SP, there was no ST backup plan for failure at Zeus etc. There has been a lot more work done in all permits since then which has builtup to our present position.

The difference now is that a major player is partnering MEO in Carnarvon who has just completed their own major CR exercise. NTP/68 has been renewed and the data room is open to prospective partners. The complexion of surrounding gas fields (esp Evan's Shoal) has changed to open up the dynamics of that area. MEO is cashed up and looking for new ventures. At the time of Zeus we were relying on success in Z#1. This time we are not as reliant on the single venture in A#1.

This is shown inthe value of of MEO's assets and my figures may be seen by some as an over simplification. A change in variables will always come into play in the future with the various JV partners that may be involved, the financing of TS projects etc. There may be an increase in the no of shares on offer should extra funds be needed through CR exercises in the future but this will not be for some time as we are well cashed up without any major outgoings.

I have not taken into account the 50% participation in WA-361-P (Zeus) or the future, as yet unknown, ventures we may be embarking on. It is important to value a stock using information that is available at the present time.

Therefore my summary total of the current VPS is:

100% current assets = $0.145cps
60% non-current assets = $0.16cps
25% Artemis (@22% GCOS) = $0.72cps
50% Greater Heron (@60% GCOS) = $1.60 cps
50% Blackwood (@60% GCOS) = $0.55 cps

Total VPS = $3.17.

I have said before that by going into Artemis without any other projects underway would be disastrous should Artemis be a duster. This has been potentially remedied to a degree by the farmout of Heron. To add to this is the renewal of 361P, the prospect of new ventures and the enticing plays around Tassie Shoals.

This is not to say the SP will not drop should Artemis be a duster.

All I am saying is that the long term prospects have been secured IMHO. Without Artemis we still have:

Current assets = $0.145cps
Non-current assets = $0.16cps
Greater Heron (@60% GCOS) = $1.60 cps
Blackwood (@60% GCOS) = $0.55 cps

Total VPS without Artemis = $2.455

Even if my figures are still overly optimistic today's SP is still cheap in relation to 50% of my figures ($1.22).

Finally this is a conservative estimate. With rose coloured glasses the VPS would become:

Current assets = $0.145cps
Non-current assets (100%) = $0.26cps
Artemis (@32% GCOS) = $1.04cps
Greater Heron (@80% GCOS) = $2.14cps
Blackwood (@80% GCOS) = $0.73cps

This gives a total VPS of $4.31 or 3.27 without Artemis.

More importantly we can see that, with the right management team, MEO do have more strings than just those on Artemis' bow.

These are my observations only and are not intended as advice. The figures are all available on MEO releases, too numerous to mention.

#:>))

PS. The SP is following the same track as last year leading up to the 80c high in September with a similar retrace in August. It is interesting to note the rebound came at the same price of the CR (45c)last November.

I have a feeling it may go higher this time once the true value is realised by the instos � but perhaps that is just wishful thinking on my part.