Disclosure: I am long IVAN. (More...)
For Ivanhoe Energy (IVAN), "dénouement" might be an appropriate word:
dé·noue·ment: The final resolution or clarification of a dramatic or narrative plot. The outcome of a sequence of events; the end result.
It's been a long road, but I finally see a light at the end of the tunnel -- distressingly, I might add, as I've been peering down that tunnel for a number of years as the stock has been in a long decline.
Of late, shares of Ivanhoe Energy have been under pressure from year-end tax selling and blown-up hedge fund redemptions. But last Thursday's and Friday's (Nov. 29 and Nov. 30) huge volume expansion to over 7.7 million shares -- six times the average volume, and especially at the end of a trend -- could portend that "capitulation" is at hand. I believe that for several reasons -- for pure value alone, plus improved regulatory, fundamental, and even technical reasons -- Ivanhoe Energy is a buy.
Obviously, the stock's decline has been a big disappointment for investors and management, and the reasons would take a scholarly oeuvre to disentangle. But the short version is that the "expensive" exploratory wells didn't come in as hoped; the price of crude fell from $146 to tick lows of $35 and has stayed relatively low (currently at $89 a barrel); the global slowdown/euro crisis/fiscal mess has put those parties "interested" in their technology on their heels; the company's cash burn due to bummer exploration results and operational needs have been a great concern; and the fact that to get a heavy-to-light oil operation up and running costs a whole lot of money, plus an incredible amount of back-up/infrastructure development that's outside the purview of the company and one that requires major commitments by third parties.
I should probably begin the report with Ivanhoe Energy's Canadian Tamarack resource; however, owing to my enamored attachment with their one-of-a-kind, breakthrough technology and my hands-on experience seeing it in operation, I'm beginning this report with Ivanhoe's heavy oil-to-light oil (HTL™) upgrading process.
The HTL Process
A few years ago I visited Ivanhoe Energy's Feedstock Test Facility at the 1,200 acres campus of the Southwest Research Institute in San Antonio, Texas, and saw Ivanhoe's heavy oil-to-light-oil conversion technology demonstrated real-time. (The Southwest Research Institute is an independent, nonprofit applied research and development organization with a staff of more than 3,300 that specializes in the creation and transfer of technology in engineering and the physical sciences. The institute provides nearly 2 million square feet of laboratories, test facilities, workshops and offices. I'm told that the institute is the world leader in petrochemical research and fuels technology.) The short version of how the HTL™ works is that 100% heavy oil went in one end of the converter and 90% light oil comes out the other, the remaining 10% goes to fuel the process; significantly, process is remarkable and self-sustaining. The highly market-disruptive technology converts -- for the first time ever -- heavy oil to lighter, more valuable oil and does so effectively, efficiently, inexpensively, and in volume.
With a world running out of the light crude oil the opportunity to commercialize what is a 100% untapped market to develop the "stranded" heavy crude oil assets is immense. So as I saw the heavy oil transformed to light oil, I was more than taken by the technology; an immediate acceptance and subsequent roll-out scenario plus dollar signs danced in my head like the proverbial sugarplums. Central to this theme is that there are three barrels of heavy oil for every one barrel of light oil on the planet. Yet, there have been no licensees of the Ivanhoe technology to date anyway. I encourage you to view the Ivanhoe video that will give you a terrific explanation of the HTL™ process.
Management has said some time ago that; "Ivanhoe is currently in discussions with several international governments to contract its HTL™ process to enhance the value associated with existing, producing heavy oil fields." The closest thing to a deal has been that last May Ivanhoe signed a Memorandum of Understanding with Coban Oil and Gas to assess the feasibility of building an HTL™ facility to upgrade heavy crude oil in the Republic of Guatemala. Lots of interest apparently, but no deals have been finalized so far.
What's becoming apparent though is that Ivanhoe needs a major partner to fully commercialize the technology. It's well understood in the "refining culture" and that includes both the fully integrated oil and gas companies and their sovereign brethren, is that the Ivanhoe HTL™ technology works -- and, in my opinion, we'll see a big name show up shortly to pave the way for large scale commercialization. Several major and sovereign oil companies have been hovering about the HTL™ technology with building interest for over three years. It's about to happen, in my opinion.
To further emphasize the relevance of Ivanhoe's HTL™ technology, consider that Carlos Cabrera, Ivanhoe's executive chairman, was the president/CEO and then chairman of UOP, a Honeywell company. UOP holds the core patents on the worlds refining industry, has been around for 98 years, and has revenues of over $4 billion. UOP commercialized the thermal cracking process, setting the technological foundation for today's modern refining industry. Cabrera was a 35-year employee of UOP and if there is someone who understands the value of this technology to the world, it's Cabrera. He is said to have joined Ivanhoe because he loves the technology.
Here's a pertinent quote of his:
IVAN's HTL™ upgrading technology is uniquely positioned to help satisfy the global energy industry's increasing dependence on known reserves of heavier oil. In addition to enabling the economic production of previously unexploited heavy oils, HTL™ has shown that it can extend the life of large oil fields that are increasingly producing heavier crude oils that are more difficult to transport to markets.
Also of note: Since 2000, Cabrera has served as president and CEO of China's National Institute of Low Carbon and Clean Energy (NICE) based in Beijing.
The Tamarack Project
I spoke already of Ivanhoe Energy's Canadian Tamarack resource -- the value here alone far surpasses the market cap of the company. For starters, the resource was significantly upgraded in 2011 and is expected to produce at approximately 40,000 barrels per day for at least 30 years. The porosity and permeabilities are considered excellent reservoir characteristics. Management has been plowing away at a stack of engineering, financing, regulatory and environmental labors since 2008 and has targeted initial oil production for 2015.
Regulatory/environmental approval is now imminent from the Alberta Environment and the Energy Resources Conservation Board, per information from Ivanhoe's presentations and website. Because of Canadian regulations reserves cannot be "booked" without environmental approval. Key is that with this approval the 520 million barrels of recoverable potential can be then considered as a substantial addition to the asset side of the balance sheet with a corresponding significant impact on market cap. And it revises all the capital ratios of assets to liabilities that all institutions compute when they buy and/or add to existing positions. Heavy oil in the ground is worth about $1.00 a barrel once it has been blessed with regulatory approval and that makes the value of Tamarack well over two times the current market cap of IVAN's $148 million. Add the probable reserves (2P) of 175 million barrels, and you get the picture. Some estimates are that there are as much as 1.4 billion barrels in the Tamarack reservoir.
Notably, the regulatory approval and subsequent booked reserves will be of central importance to the Canadian institutional buyers as it is essential for Canadian institutional buyers and others to want a strong balance sheet and will allow them to purchase or add to their positions. While it's thought to cost about $1.4 billion in capex to get the first 20,000 bbd up and running consider with the price of oil at, say, $80 X 520 million barrels, or perhaps more than a billion barrels, and we're dealing with truly whopper numbers.
Ivanhoe's management believes that the 100% owned Tamarack's reservoir characteristics are very similar to Suncor's operational 30,000 barrel-per-day MacKay Riveroil sands facility -- one of the largest, longest-producing and most successful commercial operations of its kind in Canada and located only 12 miles away from Ivanhoe's reservoir.
Liquidity Concerns and Money Due From Ivanhoe's Divested Chinese Operations
Per today's press release and the available data, Ivanhoe will shortly receive $105 million from Royal Dutch Shell, and another $20 million holdback upon the transfer/assignment of their Zitong Chinese operations. I might add that Ivanhoe will garner a significant profit from the disposition of this bloc. In addition, Ivanhoe will receive $40+ million from the divestiture of their interest in their China Dagang project that's also due to close shortly. In addition, per SEC docs; their cash balance as of Sept. 30, 2012, was $16 million. Net-net, the company will shortly be flush with cash and looks to retire the UBS bridge loan of $50 million.
Ecuador -- Pungarayacu
Regarding IVAN's enormous Ecuadorian Pungarayacu field (426-square-mile block, about 40 miles long and 10 miles wide), independent third-party engineering analysis shows "up to between 4.3 and 12.1 billion barrels" of oil in place. By any standard, anywhere, this is a huge hydrocarbon deposit. Importantly, the resource may be even bigger than first thought: "Additionally, initial internal interpretations may also suggest an extension of the field beyond what was originally estimated."
The resource is so big that a partnership with a big company or a sovereign company is now becoming obvious. A recent company presentation about Pungarayacu said that "Ivanhoe is pursuing partnerships with industry participants." Not much meat on the bone there, but as Ecuador is on the west coast of northern South America I can foresee an Asian connection here, likely with a major Chinese "blessed" company perhaps even a sovereign becoming a major partner in some form with likely down-stroke of more cash to Ivanhoe.
Net-Net
Post the sale of their non-core assets, and the regulatory/environmental approval Ivanhoe's balance sheet will be dramatically improved. The company will then be focusing on their HTL™ technology and their proven reserves in Canada. The transformation of Ivanhoe Energy is close to becoming a reality in my opinion.