Omagine Set To Profit From Multi-Billion Dollar Real Estate Project
Nov. 25, 2014 11:31 AM ET | About: Omagine, Inc. (OMAG)
Disclosure: The author is long OMAG. (More...)
Summary
The Omagine Project is a multi-billion dollar tourism and real-estate development to be built in Oman, an hour from Dubai and Abu Dhabi.
Partners include one of the largest construction companies in the Middle East and the sultan of Oman. One of the largest banks in the world will help arrange financing.
Omagine, Inc. owns 60% of the project, which is estimated to produce $900 million in net positive cash flows over the next seven years.
Omagine, Inc. appears significantly undervalued at a current market capitalization of about $50 million.
The Omagine Project is a multi-billion dollar tourism and real-estate development project located in Oman, a politically and economically stable country east of Saudi Arabia and the United Arab Emirates. It will include hotels, retail shops, restaurants, office space, an open air amphitheater and stage, exhibition venues, a harbor and marina area, and more than two thousand residences. The Omagine Project's most unique aspect will be a high culture theme park consisting of seven pearl shaped buildings, each with a different theme, such as the Innovation Pearl, The Energy Pearl, and the Culture Pearl. The pearls will feature motion ride experiences, simulations, games, interactive demonstrations, multi-media presentations and possibly a planetarium, aquarium and more.
(Source: Omagine, Inc. SEC Filings)
After years of negotiations and bureaucratic delays, on October 2, 2014 Omagine LLC signed a Development Agreement (DA) with the Government of the Sultanate of Oman for the Omagine Project. Under the agreement, Omagine LLC will design, finance, build, market and operate the project. Management has conservatively estimated that net positive cash flows from the project over the next several years could be $900 million.
Omagine, Inc. (OTCQB:OMAG) is the U.S.-based parent company of Omagine LLC with a 60% ownership stake in the LLC. It trades on the OTCQB and has approximately 16.9 million shares outstanding.
Another 25% of Omagine LLC is owned by the office of Royal Court Affairs (RCA), an Omani organization representing the personal interests of the ruler of Oman, His Majesty Sultan Qaboos bin Said. In exchange for this 25% stake, the RCA will contribute $19,865,625 in cash plus 245 acres (one million square meters) of beachfront land on which the Omagine Project will be located. The land is located just west of Oman's capital city of Muscat and six miles from Muscat International Airport. It's just a one-hour plane ride from both Dubai and Abu Dhabi. The value of the land is informally estimated by Omani real-estate brokers to be worth over $700 million.
The remaining 15% is owned by Consolidated Contractors Company (NYSE:CCC), one of the largest construction companies in the Middle East. CCC will contribute $49,367,500 in cash for its ownership in Omagine LLC.
Since the signing of the agreement, some people have stated that the deal seems too good to be true. But potential investors should understand that Omagine LLC isn't simply being given this land with no strings attached, and there's no guarantee of making a profit. Omagine LLC can't just flip the land for a profit and walk away. It's required to actually design, build, and manage the Omagine Project, which is estimated to cost approximately $2.5 billion. In addition, the project will benefit Oman's tourism industry and provide jobs for Omanis. It's a win-win for Omagine LLC and the country of Oman.
Omagine LLC needs to arrange construction financing for the project within one year of the signing or the agreement can be terminated and the land would be lost. (Management estimates the maximum amount of debt financing outstanding at any one time will be between $300 and $500 million.) Omagine LLC also needs to manage the project and make sure it doesn't go over budget. It needs to meet all the requirements of the Development Agreement and secure all necessary approvals from the government. It needs to optimize the use of the land (hotels, commercial buildings, retail establishments and more than two thousand residences) and build the right amount and type of each. Omagine LLC also needs to market the project to potential residents, commercial businesses and, later, visitors to the project. If the project isn't managed well, the potential for significant future cash flows and profits could disappear.
Since project management is critical, Omagine intends to hire Michael Baker International, LLC as its Project Manager. With over $1.3 billion in annual revenue and more than 6,000 employees in over 90 offices located across the U.S. and internationally, the company is experienced in all aspects of design, program management and construction management for large scale construction and development projects.
Since the signing, potential investors have also said there's no way that Omagine, Inc., a tiny company with no revenue, can successfully complete the Omagine Project. But Omagine LLC won't be doing this alone. The company has already partnered with very large and experienced companies.
Omagine is working with BNP Paribas (OTCQX:BNPQY), one of the largest banks in the world, to help arrange financing for the Omagine Project. Additionally, Omagine has already received letters of interest and "comfort letters" from some of the largest banks in the region, including three banks in Oman. Bank Muscat, the largest financial institution in Oman, also happens to be 30% owned by the office of Royal Court Affairs, one of the owners of Omagine LLC.
The general contractor for the Omagine Project will be CCC-Oman, a subsidiary of Consolidated Contractors Company, an investor in Omagine LLC. CCC has over $5 billion in annual revenue, 120,000 employees and offices and projects in over 40 countries.
Growing value of OMAG
Now that the Development Agreement has been signed, OMAG shares should begin to reflect the value of the Omagine Project and continue to increase in price as more progress is made.
The shareholders of Omagine LLC (other than Omagine, Inc.) have agreed to make deferred investments into the LLC totaling $69.2 million once the Financing Agreement Date is triggered, which is expected to occur within twelve months after the signing of the DA. Total investment in the LLC will then be $70.2 million.
The Omagine Project's land is informally estimated to be worth over $700 million. Omagine will soon hire a professional valuation expert to appraise the land.
Omagine LLC will pay to Omagine, Inc. a $10 million success fee payable in five annual $2 million dollar installments beginning after the Financing Agreement Date is triggered.
Omagine LLC will reimburse Omagine, Inc. for pre-development expenses incurred by the company. This amount was approximately $9 million at the time the LLC's Shareholder Agreement was signed in 2011. Half of this amount will be paid after the Financing Agreement Date is triggered and the other half will be paid over the following five years.
VALUATION SUMMARY
Investment in LLC: $70.2 million x 60% = $42.1 million
Omagine Land: $700 million x 60% = $420 million
Success Fee: $10 million x 100% = $10 million
Reimbursement: $9 million x 100% = $9 million
Stockholders' Deficit (Sept. 30, 2014) = ($1,093,729)
TOTAL: $480 million
PER SHARE CALCULATION
Shares Outstanding: 16,858,119
In-the-money stock options, warrants, convertibles: 2,917,466 shares
Additional cash (or reduced debt) from exercise or conversion of above: $5.2 million (approximate)
Shareholders' Equity/Diluted Shares Outstanding = $485 million / 19,775,585
VALUE PER SHARE = $24.53/share
This valuation summary is only a rough estimate of value, since Omagine, Inc. can't just take the money and run. The project needs to be successfully planned, financed, built and sold/operated. The entire project will take six years or more to complete, although sales of residential houses, apartments and commercial office space will happen sooner.
The key to Omagine's value is what it will cost to build the project and how much the company can get for selling the commercial and residential properties, or alternatively, how much it can make by operating (rather than selling) components such as the theme park and hotels. In 2012 Omagine, Inc. estimated that the LLC would have $900 million in net positive cash flows over the seven year period after signing the DA.
The cost to build the Omagine Project (estimated to be $2.5 billion) plus the value of the land (estimated to be $700 million) gives a total of $3.2 billion. If Omagine LLC sells the residential and commercial properties for only $3.2 billion it will already have a profit of over $600 million. (This considers that the company is not paying anything for the land upfront but pays the Omani government $65 for each square meter of land eventually sold by the LLC to any third party.) To reach the $900 million estimate, Omagine LLC needs only a small profit margin.
To calculate the future profit per share, assuming a $900 million profit is achieved, I use the share totals above with an additional 3.2 million shares to account for the exercise of the $5 warrants (which would also give OMAG another $16 million) plus another 2 million shares to account for additional shares that might be issued in the future (a very rough estimate). I do not assume the $10 warrants will be exercised, although they certainly could be. That would add an additional 3.2 million shares and $32 million.
Omagine, Inc. has indicated it will seek new investors to purchase a small stake in Omagine, LLC in order to raise capital for initial work on the Omagine Project. I'll assume Omagine, Inc. will end up with a 55% ownership in the LLC although it could be more or less. (I'm not yet including the proceeds from selling a portion of Omagine LLC in my value calculation.)
The result is: $900 million x 55% + $16 million (warrant exercise) = $511 million
Add to that the initial investment in the LLC: $70.2 million x 55% = $38.61 million
Plus the success fee and expense reimbursement, minus Stockholders' Deficit = $17.88 million
Total = $567 million divided by 24,975,585 shares = $22.70 value per share in 6 years
(click to enlarge)
(Source: Omagine, Inc. SEC Filings)
As for taxes, the DA grants the LLC an exemption from income, corporate and capital gains taxes. Distributions made to Omagine, Inc. would still be taxable, although there are likely tax strategies which could avoid the bulk of these taxes and the company has stated it's reviewing its options.
What is OMAG worth today? There's no way to accurately answer this question, but in addition to factoring in the time value of money, you need to consider the various risks involved in getting the project from a signed contract to a finished 245 acre tourism destination with a "high culture" theme park, amphitheater, boardwalk, marinas, retail shops and restaurants, entertainment venues, hotels, commercial office buildings, and more than two thousand residences, all of which must be sold or operated by the LLC.
Some of the risks involved in an investment in Omagine, Inc. include the company not arranging adequate financing for the project, potential disputes with the government with respect to the Development Agreement, construction falling behind schedule, a decline in economic conditions in Oman (which are heavily influenced by the prices of crude oil and natural gas), a drop in property values, increased construction costs, project mismanagement, adverse changes in foreign exchange rates, political instability or civil unrest in Oman, among other risks.
Upcoming Events
With the recent signing of the Development Agreement, many more pieces of the puzzle should soon fall into place. Within the next 60 days, Omagine, Inc. expects the Ministry of Finance to ratify the DA and the LLC to enter into a Usufruct Agreement (NYSE:UA) with the government of Oman. The UA grants the LLC certain rights over the land constituting the Omagine site, including the right to sell the land.
By the end of 2014, it's expected that Savills, one of the world's largest real estate firms, will perform a valuation analysis and appraisal of the Omagine land. Also in the near future, the company expects to sign definitive agreements with Consolidated Contractors Company and BNP Paribas.
Another major upcoming event will be when the Financing Agreement Date is triggered and the other LLC shareholders become obligated to make the $69,233,125 deferred cash investment into the LLC. This will happen when the LLC closes on debt financing sufficient to pay for the Phase One activities of the project which could range from $5 million to over $20 million. This financing could come from a BNP Paribas arranged syndicate, which could take up to 12 months, from a secured loan from Omagine, Inc. to Omagine LLC, or from the sale of convertible promissory notes by the LLC. The latter two options could happen more quickly and would accelerate the beginning of Phase One activities, and thus the construction of the entire Omagine Project.
Conclusion
As Omagine hits milestones such as receiving the 245 acres of beachfront land and the $69.2 million deferred investment, arranging project financing, and breaking ground on the project, OMAG's share price should move steadily higher. And as construction progresses, we'll start to get an even clearer picture of how profitable this project will be. If all goes well, it's possible that Omagine LLC can earn well over $900 million. Continued strengthening of Omani real estate could add significantly to profits over the next six years as well.
More information about Omagine, Inc. can be found in its SEC filings as well as its moderated discussion forum.
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Source: http://seekingalpha.com/article/2710405-omagine-set-to-profit-from-multi-billion-dollar-real-estate-project?uprof=44