Ok I'll assume you are pretty new to oil investing because of the questions you are asking but I think you are getting yourself confused.
As of now, there is no oil. There is an assumption that oil can be found (and I'm firmly in that belief - and have been for many, many, many years with PCL now) but neither the 1st well (funded by WDS) or the 2nd well will be production wells.
An oilfield generally goes through a couple of cycles spanning years, exploration first, then into appraisal (in order to define all field characteristics to ensure maximised field development) and then finally development.
PCL are doing all the right things, but you have to factor your expectations. Thats where people spruiking $1 for example are frankly rampers and not necessarily investors (I'd be surprised if any of the rampers suggesting a $1 will even still be holding by the time the 1st drill is done).
The deal that PCL came up with was excellent, but you haven't quite got some of the details right. There are 3 stages of the deal.
1 - The seismic stage - WDS are paying for the full value of the seismic and will work with PCL to analyse the data (again an extra benefit to PCL as WDS's geologists with work with ours). WDS pay PCL US$1.5m which PCL have paid to Custos for an option on 1% - I'm not sure this was the best deal but it is what it is. I reckon cash in the bank would have been better.
2 - The 2nd stage is the farmin stage. If WDS like what they see, they farmin (and out interest drops to 20%). WDS pay us US$2.5m and we pay Custos US$1.0m and back the remaining US$1.5m which gives us funding to cover the next 9-10 months which should cover us through the drilling stage. I suspect WDS will plan to drill relatively quickly after the seismic is processed assuming they find something they like.
At no stage in any of these stages yet has any revenue been generated.
3 - The 3rd stage, is I guess the appraisal stage. Assuming the 1st well is successful then PCL can elect 1 or 2 things (the royalty doesn't come into it yet), we can either pay for the full 20% of the well, or give 10% equity of the block to WDS and be free carried.
FYI - drilling costs will be way in excess of A$5m. I think your conversion from Namibian $'s to AUD is out of whack. Conversion is 5.5c to 1USD, so N$1.5bn would be around about US$82.5m which is probably about right for a deepwater well. We aren't in quite fully deep water, so I would estimate the cost to be at around US$50-$60m, so PCL would need around US$10-$12m to participate in the well. If we find a good deal of oil with the first well, I'd be disappointed if PCL elected to reduce their interest to 10% as this would only value that 10% at a full block valuation of US$100m-$120m which if the 1st well was successful you'd think would significantly undervalue our interest but it would depend on if we could borrow that.
There "may" be enough data from 2 wells to move towards a development plan at that stage, but I would expect at least another 1 or 2 appraisal wells for the size of the field, again assuming that the 1st well finds oil.
The final part of the deal is only accessible following approval of the development plan. Ie. the field is explored and appraised and moves to development. Only after that stage can PCL elect to convert the interest into the royalty (its not clear if we elect to go for free carry on the 2nd well if the royalty rate will be reduced pro rata or remain the same). Ie. we would need to participate in probably 3-4 wells prior to any development plan being approved by the Namibian government, but then development (assuming the size of the possible discovery) would be very expensive. I would estimate somewhere between US$1bn and US$1.5bn depending on the concept. If you work on production rates of at least 100k bopd, you are probably talking around 10 development and probably several water or gas injectors, plus FPSO / cabling etc. Thats the time when PCL would make the call and either look to stump up their funding, for example 20% would be between US$200m-$US$300m or whether to take the royalty. Assuming 100k bopd @ US$77 brent with 95% uptime, you could be talking revenue of around $2.7bn for the full block. At 75% overriding royalty interest, that could be a royalty of around US$30m into perpuity.
Personal view is, if we see an oil discovery on the 1st well, we don't need to worry about the royalty. The decision will be made for us. The majors that are clamouring all over Namibia at the moment (assuming discoveries continue) will be looking to buy our block.
FAR is actually a pretty good example of what we could look at, from a process perspective. FAR drilled their exploration well and then participated in I think 7 appraisal wells, prior to field development plan being submitted. FAR then sold their 13.67% interest for about US$165m - including contingent payments (albeit at a time of very low oil prices). Cairn had similarly sold their interest of 40% for around US$400m - including contingent payments, and whilst these were sold at a time of low oil prices, they were sold once the development concept had been completed and the appraisal programme had been completed. Assuming the 1st well is successful, then if we assume PCL also need 7 appraisal wells (like FAR did), this could cost somewhere in the region of US$350-$400m or if we hold 20%, around US$70m-$80m net to PCL. I would expect PCL to attempt to farmout but a 5% stake isn't worth a lot other than as a non operated royalty focus, so whether we could generate that amount of money I don't know.
I'm very bullish on Namibia and have been involved in investing in oil companies in Namibia for 15 years now, its great to be seeing the traction we have over the last year or so, but some on the board need to temper their expectations somewhat.
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