just a theory ...

Sorry late,

Unforseen problems.

Howdy,

I hasten to point out some things first. It is all my own theory. I claim to have no special information. I am not an investment advisor. I am not recommending either buying or selling HDR shares. For ASIC presume I have a financial interest in HDR. Consult a licensed investment advisor. Do your own research. Read the ASX announcements for WPL and HDR. My interpretation of what is going on is just that. However I have backed it up with facts from releases to the ASX by both WPL and HDR and referenced where possible.Also from AIM in London and the other source.

Please remember, even if my conclusion makes sense to you HDR shares could fall for many reasons. Just be careful. Read the disclaimer above,below and the red stuff. We still have no real idea about anything from what has been released. All my conclusions are based in inference. Tiof could still well prove to be disappointing.

All information I have used is already contained in released announcements. What is new however is trying to come up with a reasoning behind the contradictions.

Very possible my conclusions may be wrong, then again to myself it explains a lot about recent events.

Here we go !



Give me 5 minutes ... Its not too long just bear with it.

Ever been told to shut up and eat your veggies because they are good for you ?

A lot of questions keep popping up about Mauritania.

Why has Woodside been so dull in its press releases about Mauritania ?

Why never an explanation or any elaboration ?

Why have we seen absolutely no estimate on anything on size from WPL ?

Why would it be fair to say the releases have if anything been skewed at best to be as dull as possible if not negative ?

Why have the partners sat by and not complained at the bland releases ?

Does this mean besides the bad headlines we have seen, more are to come ?

Is there a possible reason behind this ?

Why have they been so tight lipped at all the presentations sighting commercial interests when we all look at a map and they have the whole area already covered by there permits? It doesn't make sense !

Why WPL and HDR officials mentioned some hydrocarbon shows had been found in every single hole drilled so far in Mauritania, even the dusters,why no official mention ? See posts on HDR and WPL from those at the meetings and presentations.

Why when the Tiof 3 flow was abandoned last week did they immediately announce they would spend more money on another hole Tiof5, another 8 mill is it ?

If, as HDR shares seem to be telling us, there is some question, why would they be drilling Tiof5 and be talking Tiof6 at millions a hole ? Why the contradictions ?

Is there any reason why they would be possibly pouring as much money as quickly as they can into the tiof field ?

More importantly why has WPL been going up and HDR been going down ?

Since mid last month up until oil started sliding on 1/12 , one share was up 8% ,WPL, and the other down 12% ,HDR , is there a good reason ?


Why did this divergence/relationship explode and exactly when did it and why ?
I know this is really a ridiculous question but is there any possible reason a company might play down the size of a discovery or a producing field ?


There are a lot more. I shall try and cover these with an explanation and theory that makes sense to me.

Some background.

WPL vs HDR

It goes without saying WPL is one of Australia's top 20 companies with a market cap of 13.33 billion and an unbroken record of dividends going back over 13 years. With a P/E of 13.55 and tipped to get much better this financial year to reflect higher energy prices it is a darling of the market. On top of this has massive institutional support. Mauritania holdings are roughly 2.5 times the size of HDR's holdings. Also WPL holds 10.37 % of HDR's shares.

HDR, well it is in a lot of cases still viewed as a penny dreadful with almost exclusive exposure to Mauritania and its future seems married to it. HDR made its first profit last year and only from the asset sale was this achieved. HDR has a market cap of 1.056 bio. HDR has never paid a dividend and sits just outside the ASX 100. As a result of this has limited institutional support and seen somewhat as a much higher risk when compared to WPL'S well balanced portfolio.

HDR has a lot less longer term institutional support even allowing for size. This is due to both the lack of dividends and profit record and being outside the ASX100.

RECENT NEWS FROM WPL ?

Well, market has been trying to explain away WPL'S rise by maybe Shell divesting its interest.
Looking at releases over the last month, they have been dominated by Mauritania news (90 %). In fact some of the other news outside regarding Timor might have been viewed as a negative for WPL.

BACKGROUND ON MAURITANIA.

As we all now know Mauritania is an Islamic republic. The ethnic breakdowns are strangely 70 % Arab or Arab mix and 30 % Blacks. Originally a French protectorate gaining independence back in 1960. Power was seized in a coup back in 1979. It was made a Republic in 1992 and supposedly free elections held since. However the current leader/dictator has been in power for over 20 years.
In the past few years there have been numerous coup attempts and foiled attempts. Mauritania has accused a few neighbors of being involved. Population is around 2.5 million and GDP per capita is one of the lowest in the world at USD $670- PA.

Also of note locusts have ravaged the country in recent months and it must be facing a food crisis.
On a sidebar, it was the one state to support Suddam Hussiens invasion of Kuwait back in the early 1990's. Recent years it has become very pro west maybe in an attempt to repair the damage this decision did it back in 1991.

Market has placed a massive sovereign risk premium on the oil in Mauritania with the unstable political situation. The is despite the fact the oil rigs are 50 km or more offshore in most cases.

CRUCIAL ANNOUNCEMENTS OUT OF WPL AND HDR IN THE LAST 30 DAYS

I am not going to look at those we all know. Merou some hydrocarbons but not commercial.
Tiof 3 production test abandoned.

If you look at WPL it took off in two spurts over three day periods. We have received no official announcement that Tiof is even commercial. I don't expect us to. If you read on you will see why.

Anyhow WPL had two spurts one from the 17/11 up wards by 7% and then another on the 25/11 upwards by another 4%. Market has put this down to Shell selling rumor. Well WPL made a presentation on the 17/11 funnily enough. Its 123 pages long, but some very new information in it. On page 43 it appears plain the next two planned wells are called number 5 and 6. We now know Tiof 5 is one of them. On page 70 for the first time under developments, what do we have "Tiof Developments" and Tiof 5 filled in as the new drill it wasn't announced until 30/11 weekly announcement on drilling, so in fact this news was released 14 days earlier by WPL. Maybe a wild call, but well #6 looks like tiof6. Anyhow very very big news WPL talking Tiof production for the first time. Tiof on Page 70 was under developments as opposed to exploration. The presentation was set out with exploration in one section and development in another ! Further backed up on p117 discussing the tiof system. WPL shares shot up from this level clearly. It was 7% in three days. Furthermore on page 122 they talked about Tevet production being tied back into Chingeutti 10 km away. The on page 118 Banda and Pelican gas development facilities proceeding .All pointing to ..you got it ...eventual production Tiof,Tevet,Banda and Pelican.

Second spurt, on the 25/11 and what happened then, well at HDR's AGM presentation on page 7 or 8, HDR had Tiof production being stepped up to 150,000 BPD by 2008. I thought this was the first official talk of production, it wasn't as WPL already did on the 17/11 presentation. HDR is just confirming despite the lack of announcement Tiof will be producing.

Again WPL shares went up another 4%. HDR in the meantime drifted lower.
HDR focus was on the weekly reports and the negative bias, WPL with the institutions from the presentation on the 17/11 and 25/11 were marching a different tune. HDR with more mug punters and retail guys might explain it.

Well when the two big partners are talking production, it is going to happen. How big is Tiof , well we all know tiof flow rates will be low, so to be talking 150,000 bpd well even using a mean life of the well of 8 years it spells 400 mbbl plus. With slower flow rates for Tiof it would seem only bigger to me.

Chinguetti production license was for 25 years just for your information.

There is a reason why they haven't and can't come out with any size regarding Tiof. I am getting there.

HOW DOES MAURITANIA BENEFIT FROM OIL PRODUCTION

Simply put there are two direct ways they will benefit.

One is from a royalty fee from every barrel of oil produced. These range on an enormous scale but normally from 4% of gross to 21%. I think most reasonable ones fall within the 12-14% range. I suspect the agreement is well below this range see comments further on for the reason.

Secondly is by having an agreement to buy back into the fields for some sort of penalty. We know there is one in place with Mauritania and it has just been exercised on the Chinguetti field.

COSTS OF CHINGUETTI FIELD

Just to remind you the estimated cost of the field to bring to production is around the 600 million dollar mark.

Has the penny dropped yet ?

Mauritania from what we can see its dirt poor.
It has had some extreme political problems with attempted coup or two.
As a bank I would never lend money too them.
The other recourse for them surely would be the World Bank. No again. President of the world bank for those who know their banking is appointed by whom ? Lets just say the one country in the world that publicly backed the Invasion of Kuwait and is also an Islamic republic ... You wouldn't want the bank president you went to be appointed by the President of the United States.

So how did they come up with the cash. They did get it for 12% share as we know and there is a catch.

There share comes to USD 120 mio roughly.
Well when WPL and HDR execs are happy to shut their mouths about Mauritanian there is a good reason. Why are they talking it down if anything ?

Eat your vegetables yet ?

The money came from Sterling Energy in the UK. They raised GBP 97 mio for them.
The Mauritanian government only used them I suspect as a last resort. It will cost them a lot more than a bank. Sterling did it to make money for themselves.

Now WPL and HDR, I suspect, maybe they were hoping the government when they granted the production license they wouldn't take up their share. Maybe buy in later when the initial setup costs had been lowered a bit.

In fact when only 12% was taken up I was stunned. I had already discounted the full amount of 16% which in reality they were entitled to.
I viewed this as a positive for HDR. Market viewed it as a negative.

This from their AIM listing of HDR.
&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&
Government Participation

The Mauritania Government has the option of participating in PSC A up to a maximum of 16% from the date on which the first exclusive production authorisation is granted. From the effective date of its participation, the Mauritania Government must bear its percentage share of future petroleum costs and must reimburse the Contractor for 150% of those pro rata past petroleum costs (for exploration, appraisal, development, exploitation, separation, treatment, storage, transportation and marketing) which have not by then been recovered.
&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&

Why was I stunned, will if you have to pay 150% of the past costs on the 16% you are going to buy into. With Chinguetti lets say they have spent 120 mio of the 600 mio estimated cost so far.
The reserve is 125 bbl recoverable. In effect you are paying 14.4 mio for 12 % plus the 50% penalty so 7.2 mio more and in total 21.6 mio to buy 12% of 125 mbbl lets say at $15- profit ...
You pay 21.6 mio for 225 mio value. And since it is a cost they will receive the real 14.4 mio back as the costs are repaid through appreciated depreciation. In reality 7.2 mio for 225 mio less of course borrowing costs until you get the money repaid. Lets say 7.2 for 200 minimum .
One can see why WPL is not amused. I can't believe they really expected the government not to buy in. From what we can see it would appear the government having to resort to getting the money this way will be paying through the nose. I suspect they were hoping for a later buy in.
This is why they are being tight lipped.
This is why every announcement is being skewed to the point of being negative. Oh Tiof 3 not so good the flow test failed but we plan tiof5, oh and tiof6. It was an obvious contradiction.
After having this stunt pulled on them I expect them to drill Tiof 20 and have all production and pipes in place before they admit to it being commercial. The government has no cash. The more they sink into pre production without coming out and admitting it is commercial makes the buy in that more expensive. Also the fact they have to pay a penalty for of 50% makes it even more so. If Chinguetti cost 600 mio to develop, Tiof will cost some more. At this stage I see tiof6 this year as the last well and of the next 8/9 suspect might be more of the same.
It must be noted at some stage the buy-in becomes too expensive. This is the whole point behind the dull to negative spin on WPL announcements. If it is going to cost 800 mio to develop Tiof if its just only the 350 mbbl, well the more they have spent of this, the quicker they can make it like a poison pill. If they managed to spend 500 mio before they actually release something the management of Sterling can use to raise funds for the Mauritanian government all the better.
Makes it very very hard to pay the penalty of 50% when it is 64 mio given the political situation over there. The risk return just gets worse and worse.
On this basis. I expect no announcement out about tiof. Tiof 6,7,8,9 pre production appraisals pre laying of pipes. All before WPL comes out and gives us a real estimate. On this basis I now understand why every positive drill has been glossed over, the tone has been bad but on the other it seemed like they were rushing to drill more and more wells. Tiof 3 was the only one planned.
Where to for HDR. Probably lower, more becoming frustrated with what's going on. Doesn't it strike you as strange not a word about Tiof but the lets drill tiof4 now tiof5 next if I was a betting man ........
The less they take up the better for WPL and HDR. So it is a case of shut up and eat you vegetables !!
Just so far the Government not taking up the 4% extra they could have if they had any money it would have been at a cost of 4% of 125 mio barrels at $15- roughly so its saved them some money, 75 million in fact between the partners. That's why they have been so stingy on the news front. On the other hand it might be argued Sterling has cost the partners 12% or 225 mio if in fact the government didn't buy in. Of course it would, the number just make sense to buy in, but the longer it is delayed the better for the partners it is !
Lastly, with such a generous buy in arrangement it is not all bad. I would suggest with the more generous buy in arrangement the royalty per barrel is lower. Hence the cost of production will be lower than some estimates. In the long run it all comes out in the wash if they take the full entitlement. Therefore I would expect the percentage they are paying royalties at will be in the lower end of the range I gave.
Just to spell out the obvious. Any positive news just gives someone like Sterling oil information to raise the money for the government of Mauriaitiania. In effect if WPL, is positive its just like giving money away to a third party !
There are only two cheap buy ins. One is as soon as the field is declared commercial and they haven't spent massive amounts on setting up production. Remember the production estimated setup costs for Chinguetti is 600 mio. The second is when the field has been producing for a while and the development costs have been paid back by around 80% by the accelerated depreciation over the first 3-4 years of the wells lives. Of course by year 4 production will have slowed down somewhat, also 80% of the startup costs recouped. Much better for HDR/WPL later rather than sooner.
But if it is going to be sooner, they will make it as expensive as they can and release the information as slowly as they can. Hoping of course the 50% penalty buy in will bite as much as possible.
Maybe WPL/HDR are re negotiating a deal to free carry of the Government themselves. It would make a hell of a lot more sense that what has happened for both parties. Sure the Government has had to pay thru the nose for the funds.
We will have to be satisfied for now from HDR and WPL presentation that yes. Tiof is commercial and also production is being planned at Tevet,Banda and Pelican. Expect lots more money ploughed in before they declare any field commercial for what must now be obvious reasons.
As to the size. No idea, but the way they are trying to drill wells depends what you think. On one hand they can't by any logic drill one well, oh we hit something, then another t4, back to t3 some tech problem but by the way we are now t5 and next t6. One action contradicts the words. Actions speak louder than words ! So does the amount of money out of this drill program they are pumping in. A little logic is needed. I don't believe Tiof 4 was on the initial drill schedule. Let alone tiof5 we are now into and possibly tiof6.
Estimates remember after tiof 2 for the size from HDR were 350 mbbl. Since then we now have 3,4,5, and possibly more after I shall let you decide.

Good theory ?
All comments welcome. Am I mad ? Or does it fit ? Not too much abuse please, spent many many hours of research on this.
I think its a beauty. Not in love with HDR shares. Like them and all the rest but have far greater exposure well spread between many shares than HDR exposure I currently hold.
Not a big fan of being treated like a mushroom. In this case there just might be a reason.
There may be some reason why a company actually does talk down a discovery !
You may disagree with my theory, and only time will tell if I am correct. My placing pieces of the puzzle together may be seen as ramping or even raving. However, the crucial information can be found on the following.
AIM listing for the Mauritanian governments buy in.
WPL presentation on 17/11 on the ASX pages 42,43,70,117,118,122
HDR presentation AGM 25/11 on the ASX pages 6,7,8,9
And the crucial funding Sterling energy
www.sterlingenergyplc.com

I am not an investment advisor. I am not recommending either buying or selling HDR shares. For ASIC presume I have a financial interest in HDR. Consult a licensed investment advisor. Do your own research. Read the ASX announcement for WPL and HDR.
Can be contacted direct on sharescene.com thru personal message to kahuna1 ...
Or kahuna1aus at netscape.net