'sltibbs' pid='10459' datel Wrote:

Ultimately, the viability of the refinery loan is the expected CF generation of the refinery and the market value of the refinery. Of course, there are other secondary items of interest to the lender, which includes the viability of the other parts of the firm. If the firm struggles, then funds for items such as preventative maintenance, upgrades, expansion, etc. maybe deferred temporarily or permanently. So, yes more than just the refinery itself can play a role in the lending process, but from my vantage point I can't say that it is playing more of a role, only that it can (again secondary). My view on the spudding is that yes, they have some other funds lined up, likely from the refinery. This alone is a positive, because Ant-3 is a low risk drill that will likely increase E/A p50 estimate. Now the board has likely had conversations about the firm’s optimal capital structure, but I find it very unlikely that they would do any sort of meaningful leverage until the firm generates an adequate amount of operating CF. Doing otherwise would increase bankruptcy risk / dilution risk.

Most recent 10-q (p. 7 of http://www.interoil.com/presentation/June_2012_IOC_Financial_Statements.pdf) says: The Company believes that it has sufficient funds for the Midstream Refinery and Downstream operations; however, existing cash balances and ongoing cash generated from these operations will not be sufficient to facilitate further necessary development of the Elk and Antelope fields, appraisal of Triceratops field, condensate stripping and liquefaction facilities. Therefore the Company must extend or secure sufficient funding through renewed or additional borrowings, equity raising and or asset sales to enable sufficient cash to be available to further its development plans. Management expects that the Company will be able to secure the necessary financing through one, or a combination of, the aforementioned alternatives.

This confirms what we already knew, they needed funding to drill. They are going to spud, so they must have some sort of funding. Currently, there is around 31 million remaining on the OPIC loan and it has restrictions on “limitations on the incurrence of additional indebtedness for the refining operations” so if 100 million is indeed the loan amount proceeds would be 69 million. Also, note the OPIC loan started at 85 million at Libor plus 4.4%. Much different interest rate environment then, but curious what the new terms would be. More cent Mitsui loan is Libor plus 6%.

Best,

Sam

Sam -

I have no clue how you can say "this confirms...the needed funding to drill".  No, it confirms they can't drill A3 AND delineate Triceratops AND build condensate stripping AND build liquifaction facilities without funding.  The camp and roadways are already built for A3 activity, making this a much less expensive well to drill than A2.  They have temporarily walked from TTops (with government approval) so that is not draining significant cash in the near future.  What they CAN'T do (no doubt) is build a CSP or LNG plant without additional funding.

Let's not forget too that the only reason why the refinery didn't make money last quarter was because of a writedown of crude inventory because of the reduction in market crude prices.  Last I checked we haven't seen a subsequent additional $20/bbl price drop.

Unless I'm missing something, the spudding of A3 means nothing other than IOC continues to execute on its plan to further reduce the risk associated to getting its E/A gas to market.  Nothing more.  Nothing less.