fp_scientist, BPZ Energy (BPZI) -- As demonstrated by BPZ's business plan, the gas will not be stranded very long after it has been discovered and proven up, at least the first few TCF.
BPZ has already entered into a letter of intent with a buyer for a "take or pay" contract for 70% of the electricity that would be produced from their Phase I gas-to-power project, see excerpt from Morgan Keegan report below:
"The customers: Peru's second largest distributor, Luz del Sur, could take 100 MW, or 70% of the dispatch on a
"take-or-pay" basis for a period of 10 years. An additional 15 MW would be sold on a merchant basis where prices could
exceed baseload prices by a substantial margin during peak days. The merchant price would be based on the regulated
price, which will be determined with the execution of the Power Purchase Agreement. We have assumed a reasonable
price of $35 per kWh for the regulated price in our earnings calculations. Additionally, Luz del Sur has the option to buy
an additional 20 MW."
$35 per kWh translates to a value of $1/mcf for the gas in the ground. So BPZ appears on track to in fact have found a buyer for some of their gas at $1/mcf, in the ground. Not 4 TCF mind you, but hey, ya gotta start somewhere.
This sort of contract would be required in order for BPZ to get debt financing for the project. The IFC has seen fit to cut a check for $20 M for the equity piece of the project. Their investment would be just about worthless if BPZ were not able to get the rest of the project financed. This speaks volumes to the confidence that the IFC has in this project, which means, per se, that it also speaks volumes of the confidence that the IFC has in the ability of BPZ to find buyers for their gas (either outright or in the form of electricity) at prices that would be financially profitable for both BPZ debtholders and shareholders.
Morgan Keegan values BPZ at $3.80 per share under their "base case" valuation, which assumes that BPZ discovers "only" 200 BCF of gas, and does not export any gas to Ecuador. The relevant section of Morgan Keegan's report follows:
"VALUATION
BPZ is an early-stage company with no operating results. It became a public entity through a reverse-merger that
renders historical earnings almost irrelevant. Earnings should become meaningful once the gas-to-power project
commences operations.
Our earnings projection assumes the project is operational in 2008 and operates at 90% capacity. We have not included
potential Ecuadorian exports in our numbers because we have no way to determine an export price, nor have we
included the additional indebtedness required to see the exports to fruition. As a result, $70 million of IFC debt is
assumed rather than the proposed $120 million that would also fund the export program.
We are forecasting eps/cfps in 2008 of $0.02/$0.31 and EBITDA of $26 million. The 160 MW of installed capacity is
assumed to operate at 90% capacity and sell power at a regulated rate of $35 per kWh. Natural gas consumption is 40
mmcf/d at a 90% utilization level, a volume that can be supplied from two wells and a re-completion.
We have assumed that BPZ can deliver gas from the upstream assets to the power plant at a breakeven price of $1 per
mcf. That will depend on the deliverability of the wells and size of the reservoir, neither of which will be known at least
until well tests are performed.
The 2008 assumptions are considered the "base case" because sales are highly scaleable in the event that several
hundred bcf of natural gas is discovered. The "base case" assumes that 200 bcf is discovered, near the low end of the
108 bcf to 3 trillion cubic feet range assessed by Gaffney Kline & Associates.
Among the developments that would lead to sizeable positive revisions to our estimates are: 1) gas exports to Ecuador,
which could occur with a relatively minor investment of $50 million to monetize 100-200 bcf of natural gas, 2) expansion
of the gas-to-power plant, 3) industrial gas sales, 4) oil exploration and 5) electricity sales on the merchant market that
can realize a much higher price than $35 per kwh.
The "base case" of $26 million of annual EBITDA from just the gas-to-power business, yields a per share value of $3.80.
We place a 12x multiple on the EBITDA run rate to reflect the minimum operational life of the power plant. That results in
a value of $312 million. Peak debt of $59 million is projected, which includes debt and equity financing of $90 million and
the working capital surplus of $20 million at the end of the third quarter. The net value is $312 - $59 million = $253 million
or $3.80 per share.
With a base case of $3.80, we do not believe investors are paying very much for 3P reserve potential of a trillion cubic
feet or better. There is considerable risk that the higher reserve case may not be realized, or that operational
performance from the power plant may not justify $3.80 per share. However, a large gas discovery could spark many
developments that are difficult to model yet ultimately accretive to the Net Asset Value."
As mentioned previously, the 3P reserves that BPZ is gunning for are 4 TCF. So in valuing the stock at $3.80 per share the markets are assuming that BPZ will ultimately prove up and monetize a paltry 5% of the reserves that they are gunning for. I have taken the long side of that bet, that the market is being too harsh.
You should soon be able to take the short side of that bet, when the company gets on the Amex. Good luck to you also, fp. |
