Catherinedenerve... just in case you do pop back in at some point, thought I'd post a recent update taken from a poster on www.iii. co uk - to keep you up-to-date on GKP. Still a VERY good share to get into. If I had more spare money, I would certainly invest here...
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One of the problems with boards like this, as has recently been said, is that new investors come in and ask questions or make statements that those of us who have been here a while thrashed out a year ago and so we tend to, perhaps, not take the trouble to restate what we think we know, the known knowns, but concentrate on the known unknowns (copyright D Rumsfeld).
So for new arrivals this is a summary of how I calculate the value of GKP?s oil in Shaikan. It may differ a bit from Spidy?s wonderful creation but what I am trying to do is show something of the calculations which go to make the old timers so confident. Not every assumption will be spot on but it will serve as a rough guide.
Every barrel of oil that GKP extracts belongs to Iraq. The oil is sold and GKP receives a fee per barrel depending on a multitude of factors. We have never seen the GKP production sharing contracts (PSCs) so we cannot be certain of all their terms but we have seen sample PSCs of the type used by the KRG and we have seen actual details for companies like VAST and from time to time GKP has revealed some of the terms in an RNS, for instance, when the terms change. So what follows is an educated guess but not a certainty.
- Oil in Place in Shaikan
To start somewhere lets assume that there are 4.2 billion barrels of oil in place. This was the figure of the independent experts DGA?s early this year. It has been our lodestar for almost a year and yet I suspect its days are numbered, maybe even this week?.
- Recovery factor
Not all the oil in place can be got out so the experts allocate a percentage that can be recovered. At the Zurich AGM figures in the low 30 percents were mentioned. Gramacho is more cautious but for this purpose let?s say 30%. So 4.2bbls oip becomes 1.26bbls actually extracted over the lifetime of the field which could be long.
- Working interest
GKP shares the Shaikan license with other companies including MOL and a company connected with Todd called Texas Keystone. Some of the rights to Shaikan have not yet been allocated by the KRG. When all the rights are allocated (fully diluted) GKP will have at least 51% but because Texas Keystone has forfeited its rights, Todd said in Zurich that its share can be assumed to belong to GKP also so the final figure is 54.4%. So of the 1.26bbls extracted, 54.4% will be GKP?s share, ie 685.44mbls.
- Tax number 1 ? the top slice royalty
The KRG takes 10% of this share before all other calculations so 685.44mbls becomes 616.9mbls.
- Tax number 2 ? the Risk factor ?R?
When the PSCs were agreed each license was assigned a different risk factor and the tax now taken off is a function of that level of perceived risk. We do not know the actual figure for Shaikan but we are led to believe that 30% is a reasonable guess. The R factor is not flat but varies over the lifetime of the license as costs are recovered so using a single flat rate oversimplifies matters but should be close. So the 616.9mbls are now reduced to 30% of that figure or 185.1mbls. (The experts reading this will know that I have left out the cost oil calculation but I will come to that at the end).
- Tax number 3 ? the ETAMIC tax
As a quid pro quo for GKP getting ETAMIC?s share of Shaikan, GKP agreed to pay a further 40% final tax on its output so 185.1mbls becomes 111.1mbls. That is the net share that GKP gets and this figure can now be converted into cash.
- Revenue to GKP
How much revenue per barrel GKP will receive is clearly highly uncertain. At present it will only get half the international rate as exports are stopped. But very soon exports will recommence and then it will get a price based on Brent crude but discounted to allow for the nature of the oil and for transportation costs. Gramacho estimated that we should apply roughly an 8.5% discount to Brent to get the net revenue.
So if Brent is $85 then GKP would get about $76.8 per barrel or $8.5bn for the 111.1mbls. At £1:$1.60 that is £5.3bn or £7 per share.
- The discount factor
But sadly the final answer is not £7 per share because the revenue will come in over 30 years or more so we have to discount the stream of future revenue to a net present value. The extent of that discount is a matter of hot debate. The Minotaur has suggested that NOCs could be so keen to get the oil that they might apply a small or even negative discount factor. Personally I use NPV10 which I think is conservative particularly with Peak Oil theories gathering credence. So using NPV10 takes £7 per share to £2.24 per share over 30 years.
- Conclusion
So my version of Spidy?s machine gives £2.24 per share for Shaikan at 4.2bbls oip. But remember now to apply the BBBS factor. We believe that Shaikan will actually be shown to hold perhaps 20bbls oip and there are three other fields which, if the regional reservoir/fill to spill theories are correct could hold perhaps 100bbls oip.
Personally, to be conservative, I use a "BBBS lite" figure of 70bbls distributed over the 4 license areas in the proportions Todd has indicated and that gives me a prospective share price of?..well, work it out for yourself, let's just say it is well over £20 per share.
- Footnote
The experts will have noticed that I did not separate profit oil and cost oil. I did not do so partly to avoid over complicating the calculation but also because the actual net effect is simply to bring forward the cash flow so that my NPV10 figures are actually slightly pessimistic, but with so many other assumptions, I can live with that simplification.