The "Buntu" calculation ... ;)
As we´re getting closer and closer ... it may be interesting to recall this, and compare it with what we hear ... sooner from now on:
From Buntu:
I have read the posts by Zombiedog and TCI on ENG’s fds value if
rumours of a 7 trillion cf gas findare true. My assumption, since I am not aware of drilling activities atHartmann, is the rumoured find is confined to Kunene #1.
I have, in the course of preparing this post, read widely so as toobtain information which might be helpful in an attempt to comment onthe fds value suggested by Zombiedog. My readings have includedNamibia, the Kudu gas field in which Tullow Oil has a 90% interest, theapproach taken by Research Capital in determining the “risk”/“unrisked”values of BUK’s fds and the proposed Angola LNG facility.
Let me begin with Namibia so as to provide some background pertinent tothat country’s need for power energy and the difficulties whichconfront those who would supply the energy. I was born in South Africa,which administered Namibia (then known as South West Africa) under a UNmandate from 1918 to 1988. Although I have not been to Namibia (it ison my travel list), I am somewhat familiar with the country.
Namibia (see Namibia: Maps)
Namibia is, as you know, on the west coast of Africa. Its borderingneighbours are Angola to the north, Botswana to the east (for the mostpart) and South Africa to the south (swinging along the eastern borderfor a short distance toward Botswana). The Atlantic Ocean runs thelength of Namibia on its western side.
Namibia’s population is not much more than 2 million. The languagesused are English 7% (official), Afrikaans 60% (in which I am fluent),German 32% and numerous tribal dialects.
There are only 4 cities/towns. Oranjemund is at the southwestern tip onthe coast close to the Fish River which runs through South Africa anddischarges into the Atlantic ocean (the Kudu gas field is offshore inthe vicinity of Oranjemund). Luderitz is on the coast just north ofOranjemund. Walvis Bay is on the coast a few hundred kms north ofLuderitz. Just north of Walvis lies Swakopmund, also on the coast. Thecapital city Windhoek (population 224,000) is inland due east fromWalvis Bay/Swakopmund.
Walvis Bay and Swakopmund are about halfway up Namibia’s west coast.There is literally nothing between those towns and the northern borderexcept the Skeleton coast (notorious for shipwrecks) and the NamibDesert which runs parallel to the coast line and is known for its hugeshifting sand dunes as well as its wildlife population. The northernarea is, except for friendly local tribes, inhospitable.
My reason for telling you something about Namibia is that Block 1711lies offshore way up Namibia’s coastline close to Angola’s southerntip. Leaving aside the offshore distance to Block 1711, the distancefrom Namibia’s northern boundary to Swakopmund/Walvis Bay is about 800kms down the coastline. Keep this in mind when reading what I have tosay about Tullow Oil/Kudu gas field and the proposed Angola LNG.
Kudu gas field/Tullow Oil
Tullow Oil bought a 90% interest in the Kudu gas field in 2004 (thefield was discovered in 1974) for $570m. The company’s oil and gasexploration/ development operations are international in scope and someare at the production stage so as to provide cash flow. It has issuedsome 720m shares and its share price closed July 3rd at about Cdn$20.
The offshore Kudu gas field is approximately 170 kms northwest of Oranjemund.
The field has 1.3 trillion cubic feet (tcf) of proven natural gas.Recent exploration and analysis suggest reserves could reach 3 tcf withpotential up to 9 tcf. Some 7 well holes have been drilled with an 8thbeing planned.
Suggested development has been for a 4-well subsea tie back which wouldmake it one of the world’s largest. The tie back would connect to an800-megawatt power plant in Oranjemund for the purpose of generatingelectricity. The field would be crucial in meeting Namibia’s growingenergy demand. One-half of the generated electricity would be exportedto South Africa which is in critical need of that commodity. The800-megawatt plant has an estimated cost of $1.1 billion. That doesnot, to state the obvious, include the subsea tie back cost.
The first gas is to be delivered from the field to Oranjemund in 2010and contract negotiations for sale/purchase contracts of thegas/electricity are being negotiated.
Keep in mind the high potential reserve, the number of well holesdrilled/contemplated, the 800-megawatt power plant for generatingelectricity by using the natural gas supplied, the cost of the powerplant, the unknown cost for drilling/completing wells, the unknown costfor subsea/onshore pipelines to convey the gas to the power plant andthe progress made by Tullow Oil in developing markets in Namibia andSouth Africa for using natural gas to generate electricity. Think aboutwhat Sintneftegaz and Energulf have yet to do and the costs they arelikely to incur given the (by comparison) remote locations of Kuneneand Hartmann (the closest, most logical delivery point, being WalvisBay some 1000+ kms away).
Angola LNG facility
One should not overlook the possibility that Namibia might considerhaving an LNG facility built at, say, Walvis Bay. The facility wouldmake sense if Tullow Oil is committed to an 800-megawatt power plant ayOranjemund and Namibia also decides to go the LNG route so as to shipLNG by LNG vessels to LNG buying countries, such as Japan.
The proposed Angola LNG facility will cost about US$4.4 billion. Itwill have the production capacity of 5.2m tonnes a year and will alsoproduce propane/butane/condensate. The plant, scheduled to be built by2012, will be supplied by offshore gas fields on Blocks 14/15/17/18.
Research Capital’s approach toward evaluating BUK’s fds values (Durango gas)
I will leave aside the cost to drill, case and complete the Durangowell. I will also leave aside the cost of tie-in to the Waveneyplatform.
The commodity price (gas/condensate) was discounted 20% to $12/boe “in ground” having regard to the ICE
Futures Market price about January 2008 and to
futureprice uncertainties (“boe”, as I understand it, means “barrels of oilequivalent” thereby taking into account BUK’s gas condensate). Totaloperating, processing and transportation expenses were estimated at$1.70/mcf.
Posts by Zombiedog and TCI
Zombiedog uses a natural gas price of $13.36 per 1000 cubic feet and 64million fds to conclude that the rumoured 7 trillion cubic feet (tcf)gas field at Kunene will result in gross revenues of about $93 billion.ENG would have a 10% interest (in fact, 9.5% after the underlying 0.5%royalty) equivalent to $9.3 billion and each of the 64 million (in factabout 62 million) shares would, according to Zombiedog, be worth anestimated $146 at the production stage. Recovery and delivery costs areexcluded from the estimate.
TCI comments on Zombiedog’s post and says this: Namibia’s $ is nowherenear the US$13.36/mcf used and is in the low single digits (theconversion rate is US$1 = NAM$1.75 more or less); there is no marketfor gas (presumably in Namibia) unless used for power generation orfuture LNG exports; LNG would get good returns and power generation“not so much”; there will be equity dilutions as a “lot more funds”will be needed for required additional wells; and the netbacks via theLNG route will be much better but the upfront capital costs would be inthe $US billions (so lots of debt or new shares).
I agree with most matters highlighted by TCI. Both Namibia and SouthAfrica (its most affluent neighbour) have electricity as their mainpower supply: that is why an 800-megawatt power plant at Oranjemund iscontemplated for use of the natural gas found in the Kudu gas field(see above). TCI is also right in saying that equity dilutions are downthe line, to say nothing about debt when truly large capitalexpenditures are required (eg, power generating plant, assuming thereis a need for a second plant beside the one contemplated at Oranjemund,and/or LNG facility and/or pipelines required to convey natural gas tothe power plant). In that regard, keep in mind that some 5 years ormore will go by before Kunene (or Kunene/Hartmann) production startsand that a great deal of money will have to be raised to reach thatgoal (particularly if Hartmann exploration proceeds in the nearfuture). The cost of Oranjemund’s 800-megawatt power plant is anestimated $1.1 billion and that of Angola’s LNG facility is anestimated $4.4 billion. Add to that the operating costs, processingcosts and transportation costs (probably around 20% of gross revenues,if not higher) and you will readily appreciate that a ENG’s fds value(even at today’s 62m fds) will be far lower than $146.
We should not forget the distinct possibilities that commerciallyviable quantities of oil/condensate will also be found at Kunene, thatgas/oil/condensate in apparently larger quantities will be found atHartmann and that oil is likely to be found in the Lotshi block. Thoseevents will increase gross revenues, but will require addedexpenditures and probably result in further equity dilution.
My estimated values of the rumoured 7 trillion natural gas find at Kunene
Let me make it clear that I am not an expert in any aspect pertainingto natural gas/condensate or, for that matter, to oil. I am anunknowledgeable amateur who reads as much as can be absorbed andreadily admit there is a great deal I simply do not understand.
I am, as an investor in some companies trading on the TSX Venture,conservative by nature. My approach is to err on the low side whenestimating potential gross revenues and on the high side whenestimating the potential number of fds as well as costs.
Power generation route: estimated fds value
This assumes that Kunene’s natural gas will be supplied to a power generating plant. With that in mind, I would estimate:
the number of fds before production at 200 million the long term negotiated price for the natural gas at $9 per 1000 cf
the cost of a power generating plant at $1.5 billion
the cost of a pipeline from Kunene to the power generating plant at $200 million
the cost of drilling/completing 4 wells at $329 million
operating/processing/transportation costs at 20% of gross revenues
That being so, my estimated gross revenues for ENG would be:
7 trillion cubic feet/1000 = 7, 000, 000, 000 (ie, 7 billion)
7, 000, 000, 000 x $9 = $63, 000, 000, 000 (ie, $63 billion)
10% interest = $6, 300, 000, 000 (ie, $6.3 billion)
and my estimate of ENG’s share of costs would be:
wells (drilling/completing 4) 10% of $320,000,000 = $ 32,000, 000
power plant 10% of $1, 500, 000, 000 = 150, 000, 000
subsea and onshore pipeline 10% of $200,000,000= 20, 000, 000
operating/processing/transportation
costs 20% of $6, 300, 000, 000 (being 20%
of gross revenues) = 1,260, 000, 000
for total costs of $1, 462, 000,000 (rounded down to $1.4 billion for ease of calculation)
Based on those estimates, ENG’s 200 million fds would have an estimated value of $4.9 billion (ie, $4, 900, 000, 000) =
$24.50 a shareupon producing and delivering natural gas from Kunene to a powergenerating plant. My estimated $24.50 share value disregards any Kunenecondensate/oil and is, in my view, a conservative estimate. Note that Ihave included the cost of the power plant in my calculation. It seemsto me that the Namibian government, which needs the plant to generateelectricity, should bear that cost. If that is so, then deduct $150,000, 000 from ENG’s costs set forth in my calculation so as to reduce“total costs” to $1, 312, 000, 000. If ENG’s costs are rounded down to$1.3 billion, its 200 million fds value would have an estimated valueof $5, 000, 000, 000 (ie, $5 billion) = $25 a share.
The difference between Zombiedog’s and my estimated fds values($146/24.50) is attributable to the number of fds (64m/200m), the priceat which gas might be sold ($13.36/9 per 1000 cf) and costs ($0/1.4billion). I do not say I am right and Zombiedog will no doubt say thesame so far as it concerns his estimate. We have simply taken “stabs”at rough estimates knowing the true share price is dependent on futurevariables, not the least of which is the market’s perception of whatshares are worth.
LNG route: estimated fds value
I am relieved to “cop out” on this estimate. The information I have(cost of proposed Angola LNG facility – US$4.4 billion); how many cubicfeet of natural gas are required for 1 ton of LNG - thanks Panda; andwhat the negotiated price for LNG might be – could be $694 a ton/tonneaccording to one negotiated contract I came across) is inadequate toconsider embarking upon a calculation of net revenues/fds share value.
All I can say, is that the LNG route might well be followed bySintneftegaz/Energulf/Namcor to market the natural gas found at Kuneneand Hartmann. That would make sense if Tullow Oil goes ahead with theproposed power generating plant at Oranjemund intended to generateelectricity for Namibia and South Africa.
Oil and condensate/Hartmann/Congo not taken into account
I would reiterate that my estimated fds value is confined to Kunene’srumoured 7tcf natural gas find and the power generation route. Itassumes a proven 7tcf of natural gas “in ground” and that the entireproven reserve can be produced and is supplied to a power plant inNamibia for the purpose of generating electricity. Oil/condensate atKunene, oil/natural gas/condensate at Hartmann and oil at Lotshi in theDRC would add significantly to ENG’s fds.
Disclaimer
It should be obvious that what I have said is not to be taken as givinginvestment advice. This post has been written because I was asked byPanda and Britnick to undertake the task.
You should know that I have no shares in ENG. I started off with 85,000shares and sold them over time so as to invest in other companies withperceived growth potential by the end of November this year. For whatit is worth, I am not a day trader and never “short”. I prefer the longterm investment approach.
buntu