http://seekingalpha.com/article/1081671-interoil-no-remaining-obstacles-to-an-imminent-blockbuster-deal?source=email_rt_article_title&ifp=0 An objective reflection upon InterOil's (NYSE: IOC) progress over the past year inevitably yields the conclusion that unprecedented shareholder value has been created. At the end of last year, there were effectively two prime ministers in Papua New Guinea (PNG), InterOil had just been informed by the National Executive Council (NEC) that its proposed LNG Project was in breach of the 2009 Project Agreement, and the company had just hired three investment banks to sell a stake in its resource to a world class LNG operator.

In 2012, the anti-corruption, business-friendly Prime Minister Peter O'Neill took the helm in PNG, InterOil was granted NEC approval for its Gulf LNG Project. There have been independent and management-originated confirmations of multiple accretive bids having been made for the company's resource, including at least two by majors. The company confirmed the Antelope reservoir's continuity by intersecting the reef at its Antelope-3 well. It struck a farm-in agreement with Pacific Rubiales Energy Corp (PRE) (PEGFF.PK) pursuant to which PRE will acquire a 10.0% net participating interest in InterOil's Petroleum Prospecting License 237, and InterOil made a major new gas and condensate reefal discovery with the very successful Triceratops-2 well.

Yet, despite the company's progress and a minimum underlying value of in excess of $200 per InterOil share just for Elk/Antelope, the stock is essentially flat this year. Confusion associated with the terms of the NEC's approval of InterOil's Gulf Project has resulted in the most compelling buying opportunity I have ever encountered ahead of an imminent sell-down of the company's resource. In a Wall Street Journal article titled, "InterOil Offer May Unlock PNG Gas Project," details were provided about a draft submission to the NEC from Prime Minister Peter O'Neill and Energy Minister William Duma. According to the article, the submission: recommends the state begins talks with InterOil and its partners to acquire a larger interest than 22.5% in the Elk and Antelope gas fields 'on commercial terms reflecting market value to be agreed with the upstream participants', targeting a binding deal by the end of December.

Though market participants perceived the Wall Street Journal leak as a source of additional uncertainty, all of the evidence suggests that 1) the government is unlikely to substantially increase its stake in the Elk/Antelope resource, leaving significant room for a blockbuster sell-down directly to a major, 2) the government's increased stake, if any, will be paid for on commercial terms, and 3) the government's option increases the probability of a larger sell-down rather than the opposite scenario, which is what the market has incorrectly assumed. On page 10 of Liquid Niugini's presentation at the 12th Investor PNG Mining & Petroleum Conference, the company indicates that the 27.5% government option is for "Either PNG State Power/Infrastructure Project or Gulf LNG Expansion to 6mtpa, ~$3,000 bcfe." Since any State Power/Infrastructure Project would clearly not require gas beyond PNG's already owned 22.5% of the resource, the expansion to a second train will be the likely use of incremental gas.

Hence the PNG government's option to increase its stake to somewhere between 22.5% and 50% of the resource would only be exercised if 1) the PNG government believes that there's an arbitrage opportunity in which it could buy into the resource at, say, the $2 per mcf paid for InterOil's stake by the likes of Total (NYSE: TOT), Exxon (NYSE: XOM), Chevron (NYSE:CVX) or Shell (NYSE: RDS.A) with its K6 billion loan from EXIM Bank and retain the corresponding $4+ NAV gas and condensates, or 2) the PNG government decides to entice a major partner to take an even larger stake in the resource than it could otherwise have done if only InterOil and Pacific LNG decided what percentage of the resource to divest. [Read on here]

(12-27-2012, 12:04 AM)ltinvest Wrote: Good clarification Tree. It surprises me how many people don't know or didn't recall the 27.5% option and DMO are not new topics at all. Both discussed 3 years ago.

While we haven't discussed the takeover, buyout issue much, I reiterate it's an option management and large institutional shareholders would not oppose if a "fair" price was offered. I don't know what "fair" is necessarily but I get the impression anything under $150 would not get serious consideration. That is based on $1.50ish sell down of E/A, Triceratops, PPL 236 and future prospects. They simply feel they would be giving away too much. Ironically, the lower pps increases the likelihood of a complete buyout.

I think it is a very good article. It puts the attention back on just how positive a development NEC approval of a smaller phased in project in the Gulf is.

IOC has desired a phased in approach in the Gulf for three years. Now they have it. Start up costs are less, and by rights should attract more and higher bids.

I disagree, however, with some here who suggest the 50/50 split with the government was common knowledge. To the contrary, it created enormous confusion and temporary wealth destruction. Management to this point has done a poor job of explaining this to shareholders. I am still of the opinion that there is "method to their madness".

Allowing the government to negotiate with 4T's of gas vs 2T's, in effect, IOC renting its' gas to the government, still makes a lot of sense to me.

Today's WSJ has an article about Xstrata's escalating costs for a mining project in PNG. A recent study suggests they tap PNG's natural gas reserves instead of hydroelectricity to power the mine.

'sfiaes' pid='15209' datel Wrote:

I think it is a very good article. It puts the attention back on just how positive a development NEC approval of a smaller phased in project in the Gulf is.

IOC has desired a phased in approach in the Gulf for three years. Now they have it. Start up costs are less, and by rights should attract more and higher bids.

I disagree, however, with some here who suggest the 50/50 split with the government was common knowledge. To the contrary, it created enormous confusion and temporary wealth destruction. Management to this point has done a poor job of explaining this to shareholders. I am still of the opinion that there is "method to their madness".

Allowing the government to negotiate with 4T's of gas vs 2T's, in effect, IOC renting its' gas to the government, still makes a lot of sense to me.

Today's WSJ has an article about Xstrata's escalating costs for a mining project in PNG. A recent study suggests they tap PNG's natural gas reserves instead of hydroelectricity to power the mine.

sfiaes,

No one here ever proposed that the proposed 50/50 split option was common knowledge.  What was stated is that option for PNG is 'old news' 3 yrs. old at least.  Big difference.  The point to be made is that the option is NOT common knowledge.