Bayfisherman...here's a past poster that I respect and his calculatioins for possible ERHE valuation:
Posted by: mabenn1
In reply to: Meridian who wrote msg# 38438 Date:4/3/2006 12:38:55 AM
Post #of 109749
I haven’t posted in a long time, but I sure all of the longs that have been here for the past three years will remember me. Although I haven’t been posting, I assure you I have been here lurking every day.
I can’t yet challenge Meridian’s calculations regarding the JDA financial model. I have been trying to get the Gomnez presentations off of the JDA web site, but it appears all of the links on the press release page are broken.
For the moment, I will take Meridian’s numbers at face value.
I understand from his post that I am responding to, that net of all costs, taxes, partnership deals, etc, that ERHE could have 95MM bbls of oil in blocks 2, 3, and 4. He bases this on a “conservative” estimate of 2 B bbls per block. And that the revenue to ERHE for this oil is what ever the price of oil is at the time, since all costs and taxes have been taken into account in arriving at the 95MM bbl figure. This is an important point that I think has been lost on many here. Meridian stated very clearly that
I can also accept using a value of $40/bbl in determining forward looking financial calculations. I think we all agree that the price of oil will remain well above this mark, but from my research, oil companies always use very conservative prices in preparing forward looking financial models, and we can expect the financial markets to be equally conservative.
So I will assume that the 95MM bbls will be recovered over 20 years, starting in year 5. In other words, the oil will be recovered in years 5 thru 25. I used a discount rate of 8%. I just used a flat revenue distribution for simplicity.
95 MM bbls / 20 years * $40 = $190 MM/year revenue to ERHE (all profit)
NPV = $3,752 B
PPS = $5.28 (assuming 710 MM shares outstanding)
This NPV assumes the reserves are 100% certain. Clearly this is not the case. The ECL study uses a risk factor of 0.56. Applying this factor gives you PPS of $2.96. It appears to be within the $2-$3 range Meridian suggests. He further suggested that this is the price range to be expected through 2007, since that is when our reserves likely become proven.
All of this changes dramatically as the size of the expected reserves increases. The PPS increases linearly with the increase in the size of expected reserves. The PPS also increases in direct proportion to the price of oil.
If reserve estimates are double what Meridian suggests, then we might expect a near term PPS of $6, and a long term PPS of $10 (the difference in these two numbers being the risk factor from expected to proven).
I too am suspect of Meridian’s motives, given the time and energy he has invested here., but the numbers he has thrown out don’t appear to be way out of line BASED ON THE ASSUMPTIONS HE STATED. The real question is …. are his assumptions regarding the reserve size reasonable? If in fact the CVX find is massive and does in fact extend into our blocks, then we should see a price that is higher than $3.
If you don’t’ like Meridian’s numbers then let’s take a look from another angle. Let’s stick with the base assumption of 2B bbls per block in 2, 3, and 4. Forget about all of the cost oil, profit oil, R-factor, etc. With ERHE’s shares of 22%, 10%, and 17.7%, we should have rights to about 994 MM bbls. If you further assume that the deals we cut with our partners are in the range of a fair market deal (yes, I know, we got the deal of the century, but it still has to be in a realistic range), then a basic valuation of these expected reserves should also be valid. By a fair market deal, I mean the NPV of the share we gave up for the carry, is somewhat equal to the expected costs our partners will incur. If you use a value of $2/bbl of possible reserves, you come up with a PPS of $2.8. Once again, as the size of expected reserves increase, or the probability increases, so does the PPS.
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