The CBM Asia/ExxonMobil Deal Explained
In the precious metals resource industry we like to think that there is a lot of voodoo in pricing the value of a resource. Investors wade through mountains of data about drill holes, grade of intercept and metallurgy but are often more confused at the end than at the beginning. Even where a deposit is located is a major factor in valuation.
Other industries find valuation a lot easier. In the oil business some 85 million barrels of oil are produced and used daily from all over the world. Literally, oil is the most liquid market in the world. With oil and natural gas, every area in the world has their own formula because wells and fields change hands all the time. The same is true of Coal Bed Methane projects because after all, it is a natural gas.
As of last Friday, the price of Natural Gas on the open market was $3.63 in the US on the commodity exchange. That's for a thousand cubic feet of gas, a Mcf. A million cubic feet or MMcf would be worth 1000 times as much. But we don't really care; the figure we use most often would be for a Mcf because that's how we use it on a daily basis. However if you want to know what a field of natural gas or CBM is worth, you would want to be using a figure of perhaps a billion cubic feet (Bcf) or even trillion cubic feet (Tcf).
I have written about CBM Asia on many occasions since 2008. In my view, energy, food and water are where gold and silver were in 2001. The demand and prices are going a lot higher. CBM Asia has been planting roots in Indonesia since late 2008. I've been an owner of shares since 2008 and never sold. I think I have been in every placement since then.
CBM Asia has built an incredible technical team around the CBM assets in Indonesia they have been putting together. While they have a brilliant team and solid assets, the share value does not reflect their progress for various reasons. Working in Indonesia is like trying to do the breaststroke through cold molasses. The level of red tape is high, they are very bureaucratic, and people pretty much work at their own pace. And the basic communication from the company about their progress or lack of progress was dreadful.
Finally real progress is being made in Indonesia as TCF is picking up projects where they will be the primary operator so, to a much larger degree, they are the captain of their own ship.
Last week, the company announced major news that was pretty much ignored by shareholders. They are in the final stage of negotiations with ExxonMobil over certain Production Sharing Contracts (PSC) in both the Barito Basin and the Kutai Basin. The announcement both informed and confused at the same time.
I've learned that TCF has been in negotiations with ExxonMobil for months over the company entering into an agreement where they fund a number of wells and eventually share equally with ExxonMobil in the fields. Rumors about a pending deal were swirling around Indonesia and CBM Asia felt a legal obligation to disclose the information rather than get spanked by the Exchange if word had leaked out prematurely.
The deal should have been signed, sealed and delivered months ago but it is Indonesia after all and major oil companies move slowly. ExxonMobil would probably have preferred that the news not come out until everything was signed but CBM Asia did what their lawyers advised them to do. I must remind readers that the deal is pending, it is not signed and it's always possible that it might not happen.
That said, I do know that TCF can drill a well for about $1.5 million and it costs ExxonMobil many times that. As I understand what they are going to do, TCF will have to pay for a certain number of wells 100% and if they succeed, ExxonMobil will belly up to the bar on the remainder for their 50%. Both companies play to their strong suit. ExxonMobil has the most prolific position in the Barito Basin where it is believed there are 102 Tcf of CBM in place. And CBM Asia can be far faster on their feet and deliver a well at a small fraction of what it would cost ExxonMobil.
The company has put together a team for advancing a major CBM company. CBM Asia intends to de-risk projects and sell them off to majors when the numbers are known. Given the share price, it would be easy to conclude they are failing but the opposite is true. They say their goal is to put together 10-15 Tcf but I think they are being especially conservative. Let's go into the numbers and see if they add up.
I will compliment them on the vast improvement in the quality of their communication. I printed out their latest presentation dated Oct 2012. It's excellent and I highly suggest potential investors read it carefully. There were some numbers that were enough to reach out and poke you in the eye.
We are all pretty much familiar with the daily price of oil and that of natural gas. So we are used to thinking of natural gas as being pretty cheap. From a BTU point of view, a Mcf contains about 16% of the energy of a barrel of oil so if they were priced the same, 6 Mcf would be the same price of a barrel of oil.
But oil is easy to move around and gas isn't. So gas will be the same price wherever you have a pipeline such as the US and Canada but oil is about the same price everywhere.
Indonesia used to be an oil exporting country. Indeed, they were part of Opec. But those days are behind them. Even the production of natural gas is declining in the country. They are so short of gas they are building LNG import terminals. We don't have pipelines to Indonesia so while producers in the US are getting $3.63 a Mcf, producers in Indonesia are getting between $6 and $20 a Mcf. That's a lot.
CBM Asia has been around for four years. They have raised about $31.6 million dollars. I can't come up with an exact number for how much cash they have right now but it's in the neighborhood of $3-4 million by my calculations. With a share price of $.20 and $3-4 million in the bank, it gives them an enterprise value of $29 million. That seems pretty cheap.
The number that you really need to know is just how much it costs them to discover a 51-101 resource of 1 Mcf. That number is just under $.01. That's right, they can come up with a Mcf of CBM for a cent. The same Mcf that is selling for $6 and $20. That's pretty close to absurd. They spend $.01 to develop a Mcf, the market gives them a grand $.025 per Mcf and the market value should be $.40 per Mcf. It probably would cost them another $.01 to .03/Mcf to build a pilot project to produce gas and get an audited proved and probably reserves and contingent resources. Before a major steps up to the plate, they need to increase the classification of the asset.
Page 12 of their presentation gives a chart of what gas in the ground should be worth. Remember that in the Sekayu PSC, they have already announced a 51-101 resource of 1.06 Tcf of gas. (They own 26% of that resource) With a sales price of $6 a Mcf, the value of gas should be $.40 a Mcf or $400 million a Tcf. This is a company with a market cap of $33 million with 26% of 1.06 Tcf of gas worth $424 million in the ground. Do you see why I haven't sold any shares?
They are far enough along to start developing coverage from analysts. One from Seymour Pierce came out in July of 2012. Again, if you are a shareholder or are considering buying shares, read the report. The person doing the report used only the Sekayu Basin to develop a NPV for the company because it's the only 51-101 resource to date. He concluded the share target should be $.53 with a market cap of about $153 million. The analyst goes on to say that if he used the same multiple to value the remaining assets of the company it could generate $2.5 billion or $8.45 per share. That report was written before details of the ExxonMobil transaction leaked out and before the four joint studies the company has applied for.
Every company has issues and CBM Asia has them as well. The share structure is high, even for an energy company. They had a 51-101 resource come out on the Sekayu Basin a year ago that took three times as long as it should have to complete. With their IR guy screwing up every burp from the company, when the resource finally arrived investors dumped the shares with both hands. Actually the results were superb but the market expected a lot more and a lot sooner and they spanked the company.
I've always felt that the results should have made TCF a $1 stock and instead they had to do a major financing at $.18 and blew giant holes in their share structure. And since they were thinking the deal with ExxonMobil would have been completed months ago, they have been charging ahead and spending money, drilling four more wells in the Kutai West PSC and picking up new assets. So the $15 million they raised is mostly gone.
The good news is that there are about 106 million warrants outstanding. The exercise price is between $.18 and $.55 and if all warrants were exercised, it would bring in just over $39 million and that would go a long way to financing the company.
There are a couple of things in the wings that if CBM Asia is being accurate about could easily blow the lid off the stock. Investors should go to page 4 of the presentation and look at the time line. According to the company in the 2nd half of 2012, they are doing a 51-101 audit on Kutai-West. It's unclear if they are indicating they are initiating a 51-101 or they expect to release it during this time frame. Investors are far more interested in results than knowing a resource calculation is in progress.
Of equal importance is the company's intention to try to monetize non-strategic assets. The presentation indicates the company wants to divest the Sekayu Basin and Kutai-West in 2013. Obviously if they raised anything near the NPV of those basins after completing a 51-101, there would be little need for more share dilution.
I have groused for years at the company for a lack of visible progress. Readers may safely assume that everything they read is a mere fraction of what I have said to the company. I am a shareholder, I've been a big believer in the concept and I've lost money, as have most investors and even management who hold large positions in the company. That makes me very unhappy. With this news, I believe the corner has been turned. The deal has progressed to the point that I suspect more major institutions and funds are going to take an interest. It wouldn't take a lot of buying to run the price up a lot higher.
A signed, sealed and delivered deal with ExxonMobil would be giant. A new 51-101-resource estimate on the Kutai West Basin would be giant. Selling off non-core assets would be giant. The market cap of the company is simply absurd. Getting the share price above $.50 for a length of time would trigger mandatory exercise of most of the warrants and I'd like to see that.
The company has always been cheap at any price. I was buying shares a few days back at $.13 to average my position down. With the overhang of warrants at $.50 and shareholders who want out even if all they do is break even, I don't see the price of the stock running away any time soon. That's a good thing. Read the company presentation, read the analyst report on the company and make up your own mind. I wish there weren't so many shares outstanding but that's what it is. $10 gas and 15 Tcf of gas in a 51-101 would make for a nice share price down the road. It isn't here today but I believe it will be one day.
I own shares and have participated in a bundle of PPs. CBM Asia is an advertiser and I naturally am biased. You don't pay me to think for you so please do some thinking for yourself. The company has done an excellent job of increasing communication and I think the facts are well laid out so any investor can come to a reasonable decision. Good things are about to happen and the shares will start to reflect the real value in the company.CBM Asia
TCF-V $.20 (Nov 09, 2012)
CBMDF-OTCBB 167.9 million shares
CBM Asia website
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May 22nd, 2013
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