How big is the risk for InterOil? While there is certainly uncertainty, we can’t see any serious prolblem though..
IOC: Thoughts on This Week’s Political Developments in PNG
- We have received a lot of questions about political news from PNG over the past several days. Specifically, some investors have been concerned about media reports of a potential vote of no confidence in the current PNG prime minister, Sir Michael Somare.
- Let’s take a step back and briefly describe the way the political process works in PNG. The country is one of the 16 Commonwealth realms (the others include Canada and Australia), and it shares a Westminster-style parliamentary system. This means the head of government, the prime minister, is the leader of the majority coalition in parliament.
- In PNG, there are dozens of different parties – most of them basically factions centered around a regional leader. Because of the proliferation of small parties and the resulting parliamentary fragmentation, PNG (like, say, Italy until the last few years) has historically had a series of short-lived cabinets. In fact, what is notable is that Sir Michael was the first PNG prime minister to win two consecutive elections – in 2002 and again in 2007. This suggests that his power base (i.e., the parliamentary coalition he has assembled) has proven to be more durable than any other in PNG’s 30+ year history.
- In a Westminster system, a vote of no confidence in the prime minister is not a constitutional crisis. While of course it doesn’t happen constantly, it is actually a normal political occurrence. This week, the opposition claimed that it had enough support for a vote of no confidence against Sir Michael. That seems debatable, however, because the government subsequently held a vote to adjourn parliament until November, which it won by a majority of 56 to 32. Although this was not technically a vote of no confidence, it effectively served as such, because the opposition tried to prevent the adjournment in order to proceed to a motion of no confidence. Given that the government coalition mustered 56 votes (an absolute majority out of 109 MPs), it is doubtful whether a vote of no confidence would be successful at the present time.
- Of course, none of this is to say that the opposition won’t come to power eventually. But even if it does, we see it as essentially irrelevant as far as InterOil is concerned. First, InterOil has previously worked with the current leader of opposition (Sir Mekere Morauta) when he was prime minister from 1999 to 2002. Second, PNG politics is driven by personalities and regional factions, not ideologies. For example, it is inaccurate to see the opposition as “anti-business” in its views. It seems safe to say that whoever is leading the government will still wish to bring in foreign investment and jobs, which in PNG largely means developing natural resources.
- To be crystal clear: The recent PNG parliamentary maneuvering does not directly affect InterOil. And what is also important to underscore is that the adjournment of parliament does not imply a delay in signing an LNG project agreement with the government. Having discussed this issue with the company, we would point out that parliament does not need to vote on the project agreement. Rather, the decision is made by the prime minister and cabinet. (Along the same lines, for example, the U.S. Congress does not vote each time the Department of Energy leases offshore acreage to oil and gas producers).
- The bottom line is that we view the recent political news from PNG as a non-issue for InterOil, and our thesis on the stock remains unchanged. We reiterate our Strong Buy rating.