RE:CGX VALUATIONSDuring the work up of the model, I came to realize there is a good possibility Frontera would look to sell at least half of its equity position in CGX to a prospective JV partner – in concert with CGX farming down part of their current 67% interest in one or more of its licenses.
What would this look like?
- CGX would farm out 33% interest in their license / licenses to the prospect JV partner (CGX 33%, New JV 33% and Frontera 33%).
- In addition, Frontera would sell half of their ~73% interest equity to the new JV partner – leaving Frontera and new JV partner each having ~45% economic interest in CGX offshore license / licenses. The quick math works out to be: 73% equity interest in CGX split between Frontera and new JV partner (each now have 36.5% equity interest in CGX). 36.5% interest multiplied by CGX’s remaining 33% interest in each license equals ~12%. 33% plus 12% equals ~45% economic interest.
What does Frontera and CGX get out of the deal?
- A significant carry of future exploration, appraisal and development costs (reference Apache & Total deal). Moreover, potential risks of future shareholder dilution are practically eliminated (i.e. farm-outs or capital raises by CGX/Frontera).
- Frontera is able to harvest part of its equity investment in CGX. Moreover, limits future capex spend offshore Guyana given its size.
- Frontera and CGX are able to align interest with new JV partner – all parties motivated to protect and increase the value of CGX shares on a go forward basis.
- Sets the stage for CGX to retain 100% in the deepwater port and JV with the Guyana government.
- Frontera and new JV partner strategically position CGX to operate both licenses - promoting CGX as Guyana’s only indigenous E&P company in the basin.
What valuation would be used as a basis to support the deal? Of course, it largely depends on the updated CPR report. However, using the model that was shared earlier today – I would go with the assumption used by Hannam and Partners along with Pareto - who have assumed base case US $5/boe.
Demarara License:
- 1,500mmboe (upper cretaceous only)
- CGX Net Interest 33.3%
- Geological CoS: 30%, Commercial CoS: 70%; Total CoS 21%
- Un-risked $2.5B; Risked: US $521M
- Un-risked US $8.62; Risked sp: US $1.81
Northern Corentyne Area:
- 1,000mmboe (upper cretaceous only)
- CGX Net Interest 33.3%
- Geological CoS: 50%, Commercial CoS: 70%; Total CoS 35%
- Un-risked $1.65B; Risked: US $578M
- Un-risked US $5.74; Risked sp: US $2.01
Utakawaaka:
- 250mmboe
- CGX Net Interest 33.3%
- Geological CoS: 20%, Commercial CoS: 60%; Total CoS 12%
- Un-risked $413M; Risked: US $50M
- Un-risked US $1.44; Risked sp: US $0.17
Eagle Deep:
- 750mmboe
- CGX Net Interest 66.7%
- Geological CoS: 30%, Commercial CoS: 50%; Total CoS 15%
- Un-risked $2.5B; Risked: US $375M
- Un-risked US $4.31; Risked sp: US $0.65
Total Risked SP US $8/bbl: US $7.42
Total Risked SP US $5/bbl: U
S $4.64 Above is purely speculation...