I received an email from a journalist asking about my reaction to the June 14th AGM vote.  I thought I might just get as well post the core of my response here as a general summary of my key issues.  Here goes:

At the heart of this all is the geology of Interoil’s assets in Papua New Guinea.  A thick layer of impermeable Orubadi clay sealing vast limestone and dolomite formations above a kitchen of petroleum producing mudstones.  Hugely productive record setting wells with pay zones greater than a thousand feet thick.

 An old saw in the hydrocarbon business is that you find hydrocarbons next to where you found them before.  Interoil had five straight discoveries…Elk, Antelope, Triceratops, Bobcat and Raptor. There remains the potential for far more hydrocarbon to be discovered adjacent to what Michael Hession has consistently described as the largest discovery in the Western Pacific in over 20 years.

At the outset, the proxy war at the AGM in NYC made it clear that Phil Mulacek was not an isolated disgruntled former employee. Typically dissenting shareholder resolutions are normally at best token indications of displeasure with a company’s practices.  Rarely do they result in anything more than an asterisked end note printed in 6 point type.   Mulacek, however, in a matter of just a couple months mustered the support of nearly 30% of voting shares to replace the Board of Directors.  While much of that dissatisfaction included poor performance and extraordinary compensation schedules the core of the complaint was, and remains, the deal with OSH and Total to sell the company.

Contrary to IOC’s upbeat announcement (1) titled “Shareholders Overwhelmingly Re-elect All of InterOil’s Director Nominees” the AGM vote had to greatly disturb both Hession and Botten.  Only 33.4% of Shareholders are required by Yukon law to prevent the IOC sale to OSH. Those voting with Mulacek June 14^th clearly were voting against the sale of the company as well as against the Board that authorized the sale.

While Mulacek’s personal commitment to solicit proxies was extraordinary management at IOC worked hard for their vote as well.  I personally received three separate mailings with the “white” management ballot.  Such duplication I can only interpret to be an attempt to assure my normal perfunctory vote for management.  My case was not by any means unique.

The more IOC shareholders understand the resource and resource potential afforded by IOC’s licenses the more likely they see this deal to be at best bad and at worst grand theft. That is why I’m hopeful.

I don’t believe the deal will be approved. Here are some of the reasons:

1. Press coverage of this deal has yet to balance. If and when the IOC story is told from the view of IOC shareholders those not tracking their IOC investment closely will see what a bad deal this is.  This is a rare case where a corporation’s CEO does not perform as an advocate for his shareholders and instead agrees to not provide full disclosure or even discuss the full implication of a corporate sale.

A strict gag order was imposed by the Agreement preventing employees or board members from even entering into a discussion that might compromise the deal.  Gag orders of any kind should set off alarms.  Combine gag orders with a $65 million break fee and you immediately recognize somewhere there’s something very sensitive involved.   The reasons for this have been touched on but certainly not fully explored.

2. Contrary to what is being said, the economic advantages of scale and shared infrastructure with PNG LNG are as available to a Total/IOC/OSH joint venture as they are to a Total/OSH joint venture. The suggestion that somehow IOC has any authority or incentive within the JV to not take advantage of any or all cooperative efforts between Papua LNG and PNG LNG is ludicrous on its face.  What does ring true is the gas and condensate found in present discoveries outside PRL15, and all future discoveries within IOC’s highly prospective license areas would have to be purchased from IOC.

Thus the claim of enhanced cooperative opportunities appears as a classic red herring.  A far more logical view would conclude the advantage to an OSH/TOT only JV is that IOC would no longer be in a position to either engage farm in partners and/or sell future gas for future plant expansions.

3. Based upon multiple recent public presentations by IOC management the company is not in critical need for new funding.  For example, in the company’s presentation at the January 2016 Goldman Sachs energy conference (2) it was demonstrated IOC had a clear funding path through Papua LNG construction.  This was based on a new $400 million US credit facility and the anticipated Certification and FID payments pending from Total.

The extraordinary costs and inefficiencies of the recent well drilling campaign are now behind IOC and their licenses have been secured for years. Hession has sold off almost all physical assets and the workforce has already been cut by over 80%.  IOC might have to hibernate for several years to survive, depending upon the size of the certification payment under the contract with Total, but that has yet to be seen. There is no reason here to sell the company now.  When asked in a recent conference call with Raymond James why sell the company now Michael Hession had no response.

5. The CVR value set in the agreement is a bad deal for IOC shareholders.  It provides less revenue for IOC shareholders in almost every certification scenario.  Rather than enhancing value for IOC shareholders the structure funds OSH’s certification responsibility to PacLNG while it reduces Total’s payout obligations under the IOC/Total SPA. This consideration by itself is likely to shortchange IOC shareholders by more than a billion dollars.

The new CVR formula provided in the Agreement starts by undervaluing the gas in place at a low certification number and progressively gets worse from the view of an IOC shareholder as the certified numbers increase.

Underestimating gas in place at E/A serves to reduce the apparent economic losses to IOC shareholders and thus supports approval of this agreement.  That is why Botten sticks to his 5 TCF number.  That is why Hession, since the announcement of this agreement, has been ignoring the 2C certification of 10.2 TCF by its own official independent certifier GLJ Petroleum Consultants as if it didn’t exist.

With the more likely 2C certification of 10.2 TCF (supported most recently by hundreds of millions of dollars spent by IOC for drilling, aerial and seismic geotechnical studies and extended reservoir flow tests) two things happen.  First, OSH obligations to pay PacLNG are greatly increased at a time when gas prices are low and OSH cash flow has been greatly reduced. Second, the size of the certification payment direct to IOC from Total is greatly increased.  These effects are further enhanced should Hession’s predictions of an additional 3 TCF is realized with the drilling of Antelope 7 thereby raising the 2C certification to 13.2 TCFe.

6. Only if you believe Papua LNG will not be built does it make sense to trade a 32.5% interest in Papua LNG for less than 8% interest in each of the two LNG plants combined.  Such a decision not to build would fly in the face of the global interests of Total and the political and economic interests of PNG. On the other hand, a two train expansion of PNG LNG using E/A gas would neither benefit nor disadvantage IOC any more than its JV partners Total or OSH. Either way IOC shareholders are far better off now than if the company is sold.

7. Investors are realizing the gas and condensate discoveries at Triceratops, Bobcat and Raptor are being given away as if extraneous chattel along with 30 drilling prospects and leads.  Remember the geology.  As recently as the Q4 2015 Update conference call of March 20, 2016 (3) these three discoveries alone were independently certified at 6.4 TCFe!  That quantity by itself is almost enough to supply ANOTHER two 3.5 MTPA trains, be they added to Papua LNG or PNG LNG. In this agreement Hession gives these properties away for nothing, along with over 3 million acres of additional prospecting property, 90% of which has that tight Orubadi cap that kept the Elk/Antelope gas in place for over 10 million years.

8. Oil Search near term share value will remain highly speculative after the deal.  There is real concern that once IOC shares are delisted from the NYSE that some funds currently holding IOC ADRs will not, by charter, be able to own OSH that trades in Sydney.   That will put further downward pressure on OSH share value. Access to the American equity market for OSH will be greatly reduced, causing even further loss of wealth to the remaining IOC shareholders.

I could go on about the details of this deal, the pernicious incentive package and apparent malfeasance of Michael Hession and his board, or the potential harm to OSH if this agreement doesn’t go through.    I’ll just end by quoting from David Kirk’s presentation March 20, 2016 in the 4Q 2015 Update,

  “On slide 13, we take a step out from the Gulf region and look at our entire acreage.

In 2016 we will continue to advance our discovered and prospective resources towards

Commercialization with focus on the following low‐cost work streams:

-          Firstly, we will unlock value in the Eastern Papuan Basin by maturing the development options for our discoveries.

-          Secondly, we will mature and high‐grade the gas and oil prospectivity of our portfolio.

-          And finally, we remain focused on our F‐E‐D strategy – and we will work up multiple options for commercialization and strategic partnering.

-          As Michael said, we have been very encouraged by the level of interest in our assets.”

Suddenly and without warning late this spring IOC investors were shocked to find their Board of Directors had approved a sale of the company at a market cap price half of what it was when Michael Hession became CEO.

Why am I hopeful?  I am hopeful because all the rational arguments against the deal appear all on IOC shareholders’ side.  That has to count for something.

(1) http://www.interoil.com/iocfiles/documents/investorrelations/newsandpressreleases/2016/2016-06-14%20IOC%20media%20release%20-%20InterOil%20Shareholders%20Overwhelmingly%20Re-elect%20All%20of%20InterOil's%20Director%20Nominees.pdf

(2)LNG from PNG, Slides 16 and 17, http://www.interoil.com/iocfiles/documents/investorrelations/presentationanddocuments/2016/2016-01-06%20IOC_GS%20Global%20Energy%20Conference%20and%20LNG%20roadshow%20PPT.pdf

(3) Interoil Q4 2015 Update, page 4, http://www.interoil.com/iocfiles/documents/investorrelations/presentationanddocuments/2016/2016-03-30%20IOC%20Q4%202015%20Results%20PPT%20with%20Notes.pdf

Thanks so much for your efforts!

'ArtM72' pid='72758' datel Wrote:

I received an email from a journalist asking about my reaction to the June 14th AGM vote.  I thought I might just get as well post the core of my response here as a general summary of my key issues.  Here goes:

My read on one hand is hopeful. Hopeful, yet betrayal remains at the foundation of my beliefs and those of many other investors who have followed this company literally on a daily basis for years.

At the heart of this all is the geology of Interoil’s assets in Papua New Guinea.  A thick layer of impermeable Orubadi clay sealing vast limestone and dolomite formations above a kitchen of petroleum producing mudstones.  Hugely productive record setting wells with pay zones greater than a thousand feet thick.

 An old saw in the hydrocarbon business is that you find hydrocarbons next to where you found them before.  Interoil had five straight discoveries…Elk, Antelope, Triceratops, Bobcat and Raptor. There remains the potential for far more hydrocarbon to be discovered adjacent to what Michael Hession has consistently described as the largest discovery in the Western Pacific in over 20 years.

At the outset, the proxy war at the AGM in NYC made it clear that Phil Mulacek was not an isolated disgruntled former employee. Typically dissenting shareholder resolutions are normally at best token indications of displeasure with a company’s practices.  Rarely do they result in anything more than an asterisked end note printed in 6 point type.   Mulacek, however, in a matter of just a couple months mustered the support of nearly 30% of voting shares to replace the Board of Directors.  While much of that dissatisfaction included poor performance and extraordinary compensation schedules the core of the complaint was, and remains, the deal with OSH and Total to sell the company.

Contrary to IOC’s upbeat announcement (1) titled “Shareholders Overwhelmingly Re-elect All of InterOil’s Director Nominees” the AGM vote had to greatly disturb both Hession and Botten.  Only 33.4% of Shareholders are required by Yukon law to prevent the IOC sale to OSH. Those voting with Mulacek June 14^th clearly were voting against the sale of the company as well as against the Board that authorized the sale.

While Mulacek’s personal commitment to solicit proxies was extraordinary management at IOC worked hard for their vote as well.  I personally received three separate mailings with the “white” management ballot.  Such duplication I can only interpret to be an attempt to assure my normal perfunctory vote for management.  My case was not by any means unique.

The more IOC shareholders understand the resource and resource potential afforded by IOC’s licenses the more likely they see this deal to be at best bad and at worst grand theft. That is why I’m hopeful.

I don’t believe the deal will be approved. Here are some of the reasons:

1. Press coverage of this deal has yet to balance. If and when the IOC story is told from the view of IOC shareholders those not tracking their IOC investment closely will see what a bad deal this is.  This is a rare case where a corporation’s CEO does not perform as an advocate for his shareholders and instead agrees to not provide full disclosure or even discuss the full implication of a corporate sale.

A strict gag order was imposed by the Agreement preventing employees or board members from even entering into a discussion that might compromise the deal.  Gag orders of any kind should set off alarms.  Combine gag orders with a $65 million break fee and you immediately recognize somewhere there’s something very sensitive involved.   The reasons for this have been touched on but certainly not fully explored.

2. Contrary to what is being said, the economic advantages of scale and shared infrastructure with PNG LNG are as available to a Total/IOC/OSH joint venture as they are to a Total/OSH joint venture. The suggestion that somehow IOC has any authority or incentive within the JV to not take advantage of any or all cooperative efforts between Papua LNG and PNG LNG is ludicrous on its face.  What does ring true is the gas and condensate found in present discoveries outside PRL15, and all future discoveries within IOC’s highly prospective license areas would have to be purchased from IOC.

Thus the claim of enhanced cooperative opportunities appears as a classic red herring.  A far more logical view would conclude the advantage to an OSH/TOT only JV is that IOC would no longer be in a position to either engage farm in partners and/or sell future gas for future plant expansions.

3. Based upon multiple recent public presentations by IOC management the company is not in critical need for new funding.  For example, in the company’s presentation at the January 2016 Goldman Sachs energy conference (2) it was demonstrated IOC had a clear funding path through Papua LNG construction.  This was based on a new $400 million US credit facility and the anticipated Certification and FID payments pending from Total.

The extraordinary costs and inefficiencies of the recent well drilling campaign are now behind IOC and their licenses have been secured for years. Hession has sold off almost all physical assets and the workforce has already been cut by over 80%.  IOC might have to hibernate for several years to survive, depending upon the size of the certification payment under the contract with Total, but that has yet to be seen. There is no reason here to sell the company now.  When asked in a recent conference call with Raymond James why sell the company now Michael Hession had no response.

5. The CVR value set in the agreement is a bad deal for IOC shareholders.  It provides less revenue for IOC shareholders in almost every certification scenario.  Rather than enhancing value for IOC shareholders the structure funds OSH’s certification responsibility to PacLNG while it reduces Total’s payout obligations under the IOC/Total SPA. This consideration by itself is likely to shortchange IOC shareholders by more than a billion dollars.

The new CVR formula provided in the Agreement starts by undervaluing the gas in place at a low certification number and progressively gets worse from the view of an IOC shareholder as the certified numbers increase.

Underestimating gas in place at E/A serves to reduce the apparent economic losses to IOC shareholders and thus supports approval of this agreement.  That is why Botten sticks to his 5 TCF number.  That is why Hession, since the announcement of this agreement, has been ignoring the 2C certification of 10.2 TCF by its own official independent certifier GLJ Petroleum Consultants as if it didn’t exist.

With the more likely 2C certification of 10.2 TCF (supported most recently by hundreds of millions of dollars spent by IOC for drilling, aerial and seismic geotechnical studies and extended reservoir flow tests) two things happen.  First, OSH obligations to pay PacLNG are greatly increased at a time when gas prices are low and OSH cash flow has been greatly reduced. Second, the size of the certification payment direct to IOC from Total is greatly increased.  These effects are further enhanced should Hession’s predictions of an additional 3 TCF is realized with the drilling of Antelope 7 thereby raising the 2C certification to 13.2 TCFe.

6. Only if you believe Papua LNG will not be built does it make sense to trade a 32.5% interest in Papua LNG for less than 8% interest in each of the two LNG plants combined.  Such a decision not to build would fly in the face of the global interests of Total and the political and economic interests of PNG. On the other hand, a two train expansion of PNG LNG using E/A gas would neither benefit nor disadvantage IOC any more than its JV partners Total or OSH. Either way IOC shareholders are far better off now than if the company is sold.

7. Investors are realizing the gas and condensate discoveries at Triceratops, Bobcat and Raptor are being given away as if extraneous chattel along with 30 drilling prospects and leads.  Remember the geology.  As recently as the Q4 2015 Update conference call of March 20, 2016 (3) these three discoveries alone were independently certified at 6.4 TCFe!  That quantity by itself is almost enough to supply ANOTHER two 3.5 MTPA trains, be they added to Papua LNG or PNG LNG. In this agreement Hession gives these properties away for nothing, along with over 3 million acres of additional prospecting property, 90% of which has that tight Orubadi cap that kept the Elk/Antelope gas in place for over 10 million years.

8. Oil Search near term share value will remain highly speculative after the deal.  There is real concern that once IOC shares are delisted from the NYSE that some funds currently holding IOC ADRs will not, by charter, be able to own OSH that trades in Sydney.   That will put further downward pressure on OSH share value. Access to the American equity market for OSH will be greatly reduced, causing even further loss of wealth to the remaining IOC shareholders.

I could go on about the details of this deal, the pernicious incentive package and apparent malfeasance of Michael Hession and his board, or the potential harm to OSH if this agreement doesn’t go through.    I’ll just end by quoting from David Kirk’s presentation March 20, 2016 in the 4Q 2015 Update,

  “On slide 13, we take a step out from the Gulf region and look at our entire acreage.

In 2016 we will continue to advance our discovered and prospective resources towards

Commercialization with focus on the following low‐cost work streams:

-          Firstly, we will unlock value in the Eastern Papuan Basin by maturing the development options for our discoveries.

-          Secondly, we will mature and high‐grade the gas and oil prospectivity of our portfolio.

-          And finally, we remain focused on our F‐E‐D strategy – and we will work up multiple options for commercialization and strategic partnering.

-          As Michael said, we have been very encouraged by the level of interest in our assets.”

Suddenly and without warning late this spring IOC investors were shocked to find their Board of Directors had approved a sale of the company at a market cap price half of what it was when Michael Hession became CEO.

Why am I hopeful?  I am hopeful because all the rational arguments against the deal appear all on IOC shareholders’ side.  That has to count for something.

(1) http://www.interoil.com/iocfiles/documents/investorrelations/newsandpressreleases/2016/2016-06-14%20IOC%20media%20release%20-%20InterOil%20Shareholders%20Overwhelmingly%20Re-elect%20All%20of%20InterOil's%20Director%20Nominees.pdf

(2)LNG from PNG, Slides 16 and 17, http://www.interoil.com/iocfiles/documents/investorrelations/presentationanddocuments/2016/2016-01-06%20IOC_GS%20Global%20Energy%20Conference%20and%20LNG%20roadshow%20PPT.pdf

(3) Interoil Q4 2015 Update, page 4, http://www.interoil.com/iocfiles/documents/investorrelations/presentationanddocuments/2016/2016-03-30%20IOC%20Q4%202015%20Results%20PPT%20with%20Notes.pdf

I Think that I'm being polled by the same journalist.  My reply was "No I'm still unhappy with the deal the colluding crooks are offering. I want a better deal."

You did a much a better job of ellucidating our side, but our message is the same. Don't cheat me.

'ArtM72' pid='72758' datel Wrote:

I received an email from a journalist asking about my reaction to the June 14th AGM vote.  I thought I might just get as well post the core of my response here as a general summary of my key issues.  Here goes: > > >

Contrary to IOC’s upbeat announcement (1) titled “Shareholders Overwhelmingly Re-elect All of InterOil’s Director Nominees” the AGM vote had to greatly disturb both Hession and Botten.  Only 33.4% of Shareholders are required by Yukon law to prevent the IOC sale to OSH. Those voting with Mulacek June 14^th clearly were voting against the sale of the company as well as against the Board that authorized the sale.

> > >

Why am I hopeful?  I am hopeful because all the rational arguments against the deal appear all on IOC shareholders’ side.  That has to count for something.

WHAT A GREAT OVERVIEW.

May I add one important point to your comment above.

> From May 20 until the shareholding cut off date for voting on the deal, 17,330,400 shares were traded.

> Some of these shares were SHORTS leaving the building

> BUTT many of the shares were picked up by Phil Mulacek's supporters who intend to vote NO to the deal.

I predict a NO tally of well over 40% ... our OSHexit

'Stavros' pid='72767' dateline='<a href="tel:1466901 Wrote:

.

May I add one important point to your comment above.

> From May 20 until the shareholding cut off date for voting on the deal, 17,330,400 shares were traded.

> Some of these shares were SHORTS leaving the building

> BUTT many of the shares were picked up by Phil Mulacek's supporters who intend to vote NO to the deal.

I predict a NO tally of well over 40% ... our OSHexit

How do we know it was Mulacek's supporters?  I would think Total and OSH interests would have as great or greater interest in forcing this deal through. Their purchase would almost seem an immediate win win scenario.