Management has not yet provided detailed production guidance (figures will be made public upon filing of the application to develop the GSA by year-end), but has stated that these fields will take total company production over 20,000 boed in 2013, double what we expect Ithaca to be producing after Athena (22.5% interest) is onstream later this year.
Ithaca estimates its share of the capital costs of developing the GSA will be US$425–460 million, all of which is expected to be internally financed. We expect the Company to remain debt-free for some time, although the Company has a US$140 million bank debt facility.
Operating costs of the fields are estimated at $8-12/boed, and are low as a result of the ownership of the production unit.
As a result of these transactions, Ithaca has a 54.66% interest, Dyas has a 25.34% interest, and Petrofac has a 20% interest in the GSA. Prior to the transactions, Ithaca held 50.33% of Stella and Harrier, 100% of Hurricane and 68.33% of Helios. Ithaca’s share of proved and probable reserves in the GSA is 32.1 million barrels equivalent.
Prior to these transactions, Ithaca’s total proved and probable reserves were 51.8 million barrels equivalent. As a result of the acquisition of Challenger, Ithaca gains 10.6 million barrels equivalent, divests 1.2 million barrels equivalent to Dyas and transfers 8.3 million barrels equivalent to Petrofac, resulting in total reserves of 52.8 million barrels equivalent. Ithaca’s total reserves have increased by 1 million barrels equivalent after these transactions, and the Company has acquired an interest in the floating production unit.
Ithaca’s reserves were valued at US$11.93/boe in their 2010 reserve report; on this basis the Petrofac reserve transaction therefore has an apparent value of US$99 million, which would be offset by a put option to Petrofac on the production unit when the field is depleted, which has a gross value of $40 million.
Due to the lack of financial data relating to some of the assets in the transactions, we are unable to render an opinion as to the values of what was given up and what was received; the final arbiter will be the year-end financial and reserve numbers, when we can determine whether the asset value has been maintained throughout 2011. Although shares outstanding this year will increase by at least 28%, this will be offset by reserves likely increasing and their economic value increasing due to commodity prices; in addition, the working capital position will likely be higher than it was last year and should result in a near maintenance of asset value for shareholders while increasing cash flow, the other main valuation metric.
Production of 20,000 boed, at today’s commodity prices, would result in cash flow of approximately $2.00 per share - we would expect the stock to trade at multiples of three to six times, providing a long term target of $6.00 - 12.00. The stock is trading at four times this year’s cash flow estimate of
.50, and two times next year’s base estimate of $1.00 (depending upon production, we think the Company could report cash flow as high as $1.25 in 2012). Current production is approximately 5,000 boed, and Ithaca has a de-risked growth profile that will quadruple production in less than two years.
We continue to be impressed by management’s ability to meet the capital demands of growing production and cash flow during the most severe financial crisis in decades, when raising equity and debt have been exceedingly difficult, and some peers have disappeared.
This latest series of simultaneous transactions with a variety of industry partners, demonstrates management’s skill in negotiating terms while maintaining control of large projects - Athena whose gross production is estimated to come onstream by year-end at over 20,000 bd, and the GSA with gross production of 30,000 boed – a total of over 50,000 boed gross of new production within two years.