The case for Far East Energy:
Far East Energy (FEEC) began operations in China in 2003 with the Enhong-Laochang coalbed methane (NYSE:CBM) blocks when their first well was spudded. The block, at just over 1000 square km (265,000 acres), is estimated to have 5.3 TCF gas in place. The PSC is split 60% FEEC and 40% CUCBM (China United Coalbed Methane Co).
In 2003, FEEC also obtained an interest in two blocks from Conoco Phillips (CoP) for the Shouyang and Qinnan PSC's. FEEC has a 66.5% interest (CoP has a 5% overriding royalty interest), and CUCBM a 30% stake. These two blocks have gas in place estimates of 18-25 TCF over 1,057,638 acres.
See the corporate website for more history.
FAST FORWARD TO TODAY
To date, 30 PSC's have been awarded to foreign companies in China. Of these, FEEC has 3, or 10%. Not bad for a $65m company.
Enhong-Laochang (often called "Yunnan") -
FEEC met its PSC exploration requirements through to 2009, however lack of access to a market means the project is basically on hold pending a forward plan.
FEEC met all PSC exploration requirements to 2009. As funds were tight, FEEC signed a farmout agreement for 75% of their interest to Arrow Energy. Also in 2009, the Chinese partner share of the block was transferred from CUCBM to Petrochina. Funnily enough, in 2010, Petrochina (together with Shell) purchased Arrow Energy. However - the exploration agreement and the farmout approval have yet to be received. Originally this was based on Petrochina not having approval to operate with foreign partners. Currently the status of this is unknown. FEEC management states they are working with Petrochina and Arrow (now Dart) and hope an agreement can be reached. They also noted they are in discussions with other majors regarding possibilities for Qinnan.
FEEC management has identified Shouyang as their "crown jewel". Shouyang is "special" because it is the first CBM field in China to have high permeability (~100md) together with a high gas content. FEEC management has focused the majority of to attention bringing the Shouyang block to Development.
Shouyang is currently producing commercial volumes of gas (over 750 mcf per day). FEEC (via CUCBM) has signed a take-or-pay gas sales agreement for $6.55/mcf for 10.5 MMCF/day. Volumes above this to be negotiated in a separate contract. FEEC forward plan is to develop the block drilling 50-60 wells annually.
THE VALUE PROPOSITION:
4.8 TCF CoP gas in place estimate (less than 45% of the block evaluated)
Additionally, #9 coal seam not included in above
70/30 FEEC/CUCBM split
5% ORRI to CoP (from FEEC share)
58% Recovery estimate
PSC requirements met
No reserves booked (2H 2010 expected)
Gas gathering system under construction from pilot area
Multiple parameter wells in place for "cookie-cutter" expansion
11.1 TCF CoP gas in place estimate
70/30 FEEC/CUCBM(CNPC) split / Arrow takes 75% of FEEC share
50% Recovery estimate
PSC requirements met, PSC out of date & needs renewal
Assume Arrow JV (or similar) goes through
No reserves booked, no timeline
2.7 TCF CoP gas in place estimate
60/40 FEEC/CUCBM split
No activity, no wells, no timeline
Buyout valuation estimates given by FEEC management
1P Reserves $1.5 B per TCF
2P reserves $1.0 B per TCF
3P reserves $0.5 B per TCF
FEEC share in Shouyang:
4.8 * .58 * .70 = 1.95 TCF (again does not include balance of block or #9 seam)
FEEC share in Qinnan:
11.1 * .5 * .70 = 3.9 * .25 = .98 TCF
It is presumed FEEC will have a cash raise late in 2010 - this would bring the outstanding shares to roughly 200m
Due to the high level of activity in Shouyang, value area at ½ of "3P" value estimate ($.25B/TCF) gives us 1.95 TCF * .25 = $480 million
Due to some activity in Qinnan, value area at ¼ of "3P" estimate = .98 * .12 = $118million
Total estimate: $598 million / 200m fully diluted shares = $2.99/share
plus a 10% premium
Pilot area: 30 vertical wells at 466 MMcf/well 1P = 14 bcf 1P
10 “parameter areas” which will hold ~25 wells ea x 466 MMcf/well 3P = 116.5 bcf 3P
1P = $1.5B * .14 = $210m
3P = $.5B * .1165 = $60m
“area value” - 1.75 TCF * $250m = $437m
Same as previous for Qinnan & Yunnan - $118m
Revenue value 25 wells at 100mcf/day @ $4.50/mcf earned @ 10x earnings- $15m
Total = $840m / 200m fully diluted shares = $$4.20/share post reserves & production startup, pre-development
Plus a 10% premium = $4.62 per share
Disclosure: long FEEC