Description

TREASURE ISLAND TRUST UNITS TISDZ $0.74

42.57M shrs
$32M mkt cap

From the TISDZ 10-Q:

“CREATION AND PURPOSE OF THE TRUST. Treasure Island Royalty Trust was
established in connection with Newfield Exploration Company's November 2002
acquisition of EEX Corporation to provide the shareholders of EEX with the
option to receive an interest in an exploration concept being pursued by EEX prior to the acquisition. The concept, referred to as "Treasure Island," targets "ultra deep" prospects in the shallow waters of the Gulf of Mexico. The trust owns, or has the right to receive, overriding royalty interests to be paid from Newfield's (or its transferees') interest in any future production that may be achieved from horizons below specified depths in the Treasure Island area.
Treasure Island remains an exploration concept and there are no proved reserves or production currently associated with the royalty interests.
The sole purpose of the trust is to hold non−expense bearing overriding
royalty interests in any future production from a specified area. The royalty interests are passive in nature. The trustee of the trust and the trust's unitholders have no control over, or responsibility for any costs related to, drilling, development or operations. Neither Newfield nor any other operator of Treasure Island properties has any contractual commitment to the trust to conduct drilling on the properties or to maintain its ownership interest in any of the properties. The beneficial interest in the trust is divided into 42,574,298 trust units, each of which represents an equal undivided portion of the trust.
TREASURE ISLAND. "Treasure Island" refers to a concept developed to explore
for oil and gas in "ultra deep" horizons below a salt weld typically found at 18,000, but sometimes as deep as 22,200, feet true vertical depth in the federal Outer Continental Shelf of the Gulf of Mexico. The Treasure Island area covers horizons below specified depths in 116 lease blocks located offshore Louisiana in the South Timbalier, Ship Shoal, South Marsh Island and Eugene Island areas.
The specified depth or depths for each of the blocks vary and were agreed upon by EEX and Newfield prior to Newfield's acquisition of EEX. The depths do not correspond exactly to the location of the base of the salt weld in all cases.
Treasure Island exploratory wells require significant lead time to plan and
drill and are very expensive and technically challenging because of the depth of the targeted horizons and expected harsh conditions such as high temperature and pressure. Dry hole costs could be more than $100 million per well. Because of these risks and high drilling costs, Newfield does not currently anticipate drilling any Treasure Island wells without one or more partners to carry all or a substantial portion of the drilling costs.
As a result of Newfield's recent acquisition of an additional lease, the
trust now holds an interest in 20 lease blocks within the Treasure Island area.
Five of these leases are scheduled to expire in 2006, six are scheduled to
expire in 2007 and one is scheduled to expire in 2009. The remaining leases are beyond their initial terms. One of the leases scheduled to expire in 2006 and three of the leases beyond their initial terms are being or will be protected from expiration by currently ongoing or planned activities under existing or proposed regulations of the Minerals Management Service. The remaining five leases beyond their initial terms are being protected from expiration by the ongoing drilling of the prospect described below. An overriding royalty interest with respect to a particular lease block will terminate if the lease expires.
Newfield is discussing potential transactions with respect to several other
prospects with third parties. However, Newfield may be unable to timely reach agreement with any of these parties.
CURRENT DRILLING ACTIVITY
The first well to test a Treasure Island prospect, "Blackbeard West," was
spud in early February 2005. The well is being drilled pursuant to agreements Newfield entered into with Exxon Mobil Corporation, BP Exploration and Production Inc. and Petrobras America Inc. in May 2004. The well, which has a proposed depth of 32,000 feet and is now expected to take more than a year to drill, is operated by ExxonMobil. The well is subject to a 1.25% overriding royalty interest held by the trust.”


The English translation of this is that during negotiations for the EEX/NFX merger, EEX executives thought there was considerable value to the TI concept (ie. Deep drilling in shallow GOM waters.). NFX was unwilling to pay for this potential so the compromise was the TISDZ royalty trust. EEX shareholders could opt for a unit of the TISDZ in lieu of like 2 or 3 cts of NFX stock. Interestingly, the structure for oversubbing for units that were not subscribed for was totally different than normal oversubs wherein your pro-rata oversub is based off your record date position. This one was based on HOW MUCH oversub you asked for. This difference was little known and allowed a lot of insiders to game the oversub and take the lion’s share of the TISDZ’s.

So, why am I posting this now and how do I value them? The TISDZ’s currently have about 11 potential drilling sites. The anticipated target size is in the 2-5Tcf range. BBW will probably hit TD in 1Q- 2Q06. It’s a VERY tight hole, so there is no good field feedback. I’m assuming that they will drill their likely-best prospects first, so let’s assume a 4Tcf target. Let’s assume: $9NG, a 5yr blowdown on the find, with a good initial flush, a 10% likelihood of success, and a 1.25% ORR. Thus EV is:

4,000Bcf X 0.0125 = 50Bcf of gas, or 50,000 Mcf at $9/Mcf = $450M divided by 42.57M TISDZ’s = $10.57 times a 10% probability = $1.057.

If we conclude that the 10% probability figure used in various reports is on the conservative side, then the units are even more undervalued. Additionally, with 8-10 other ultradeep prospects still being shopped (one is getting serious interest) and with a Treasure Bay (non-TISDZ) ppty scheduled to spud in 2006, there will be some real residual value to the TISDZ’s should BBW turn out to be a dud. Also, if BBW does hit, the TISDZ’s won’t trade just to their BBW value, but will trade much higher due to the implied now-higher value of the remaining pptys. If the Treasure Bay prospect hits, then the value of even the post-BBW-dud TISDZ’s will trade much higher.

Why now? These things can be pretty illiquid. Given that, we have at times owned almost 1 million of these, so they are tradeable. I wanted to post it now as it will take time to accumulate them, there may be some end of year liquidity, and I think there will be a great deal of hype in the project after the first of the year, particularly in the NFX research reports.

The odds are pretty good that ultimately the TISDZ’s will be worth zero. However, at 74cts they are not accurately reflecting all the good things that can happen along the way either.

Catalyst

Upcoming BBW hype in NFX research.
BBW reaching Target Depth