I'm already heavily invested in IPC, but now I'm buying again ("averaging up"). Two very successful exploration wells in Malaysia recently, phase one oil production already on stream, and the merger proposal to be released later this month. IPC doesn't get much cheaper than this, I expect the merger to boost the stock in November.
One reason why the stock price is unaffected by recent good news is probably uncertainty concerning the funding of the development costs in Malaysia. Assuming a rate of 75% bank-finance (Ian Lundin's estimate) Lundin Oil will be required to inject around US$45 MM over the next two years. Lundin Oil do have access to these amounts of cash, no stock dilution needed.
Phase 1 production from Malaysia, and Sands' North Sea oil production, will also create a cash flow that will help fund phase 2 investment. The merger will put Lundin Oil in a stronger position to negotiate the bank-financing terms.
But things have changed recently, the two recent exploration wells have resulted in a significant reduction in required investment for phase 2, primarily due to the high quality of the gas discovered, reducing the need for expensive CO2 stripping equipment. But the location of the new discoveries is also important, now they don't need to develop the more northern PM-3 fields. This substantially increases the economics of the whole project. The amount of cash required from Lundin Oil will soon prove to be less than the above mentioned $45 MM. The bank-financing terms will be announced within two months. Expect IPC to rally after that.
Phase 2 is contracted to supply gas at a rate of 250 MMCFD from November 1999. Due to the new discoveries, this rate will most certainly be increased to 350 MMCFD (Ian Lundins figure), a 60% increase, but the formal decision has not been taken yet (that's up to Petronas). This will allow Lundin Oil a bank-financing rate exceeding 75%.
The larger company and associated increased liquidity should make the share more attractive to institutional investors, which will help the share to trade at the higher levels more normally associated with these types of companies. The combined entity will give a critical mass that will make it easier for Lundin Oil to go forward.
Tomas |
