Connacher Oil and Gas

Lets scope out what the JV to develop the next 24,000 bpd of the GD might look like.

Here is what we know about this JV option........

........... the transaction is intended toinvolve an upfront cash payment related to a sell down of a substantial interest inthis Great Divide expansion project but a minority interest overall.

............. cash proceeds would be used to further enhancecorporate liquidity and reduce long-term debt, and thirdparty capital would be used to complete the staged addition of a further 24,000bbl/d of productive capacity, bringing total productive capacity at Great Divideto 44,000 bbl/d of bitumen.

.........CLL is in advanced discussions ( putatively reduced to two offers ) that should conclude in Q1 and ensure production by late 2013.

Here is how I see this unfolding........

.....a cash payment of $500 million upfront which will reduce LT debt to peer norms of debt to cash flows ( 2 to 1 ).

This will increase the balance sheet NAV by more than $1 per share and free up working capital to complete the current Algar expansion to 20,000 bpd in 2012

...........CLL will retain a 33 1/3 % carried interest in the 24,000 bpd expansion ( about 8000 bpd ) and accede 67 2/3 % interest to its JV partner ( 16,000 bpd ) who will assume all of the development costs of this phase of the GD expansion

.............immediately that the JV is signed, CLL will submit to regulatory bodies for the next expansion of the GD which is expected to be another 12,000 POD and will boost CLL,s net production to 40,000 bpd.

CLL will exit 2012 with net production of 20,000 bpd and will increase this to 28,000 bpd by 2014 and to 40,000 bpd by late 2015.

Costs of developing this 24,000 bpd expansion of the GD are estimated to be $950 million.

Given this expenditure ( $950 million plus $500 million in upfront cash ), is this an economic investment for the JV partner ?

For a 25 year RLI, the JV partner would generate about $9 billion in gross revenues and over $4 billion in cash flows, assuming a conservative $60 per barrel price over the life of the project

That looks to be very attractive, and enhanced recovery over this 25 year period ought to increase this ROE considerably.

How would the market cap of CLL respond to this JV venture ?

The
.5 billion in cash should immidiately move the share price upwards by about $1 per share, as it derisks the debt on the balance sheet, improves cash flows and provides the extra liquidity to complete the current expansion to 20,000 bpd.

At that level of annual production, CLL would be valued at about $3.50 per share plus any additional value of the refinery and conventional production or at least $4.50 per share

By late 2013, production net to CLL will have risen to 28,000 bpd and the valuation will have risen to about $6.50 per share.

From these calculations, its clear that , in the longer term, the best option for CLL is the JV option.

Further, oil prices are likley to continue rising upwards which will boost these estimates.

This is why West Point and management will not sell out to any offer below the $2 level.

By waiting a few months, that value will be ours anyway.

Having said that, the best return on investment for the suitor would be a takeover of the entire company.