Analysts: Pavel Molchanov & Alex Morris,

(Exploration and Production)

No Deal Yet, but Exclusive Talks Underway for Resource Selldown With XOM

Exxon and InterOil, in the same sentence. After a year and half of intense market

speculation about which multinational company it would sign a deal with, InterOil has

formally revealed that it is in exclusive negotiations with Exxon about a resource selldown.

This is consistent with management’s previous comments about receiving final bids from

major energy companies. The talks with Exxon are ongoing, so today’s news is not a final

deal announcement, but insofar as this news provides a blue chip “stamp of approval” –

from the world’s largest private-sector oil and gas company, no less – we think it’s a clear

incremental positive. In this context, it’s worth noting the 30% short interest in the stock –

and if you need any reminder on what that implies, take a look at the recent stock price

chart for Tesla. 

Here is what we know. InterOil plans to sell Exxon an interest in PRL 15 (the block which

includes the Elk/Antelope field) to supply gas for an additional train at the PNG LNG

project. This LNG facility will initially have capacity of 6.9 million tons per annum (mtpa),

comprised of two trains, and it is currently being built by a consortium led by Exxon and Oil

Search. Payments will be staged, and Exxon will fund additional delineation wells on the

acreage – a deal structure that is customary for these kinds of transactions. InterOil

maintains the option to develop its own LNG project, using the portion of its gas resource

which will be retained at Elk/Antelope as well as other fields such as Triceratops.

Here is what we do not know (yet). Today’s announcement was limited to identifying

Exxon. Here are the four major questions that have yet to be answered.

1. How much of the resource will be monetized?

As a general premise, in these kinds of transactions, the

“big brother” (Exxon in this case) tends to want to purchase more of the resource, and the

smaller partner tends to want to keep more for its own use.

2. What is the timeline for a final deal?

Just as management has (wisely) stayed away from self-imposing any

arbitrary deadlines in recent months, today’s press release did not specify any timetable.

3. Most importantly, what will be the multiple ($ per Mcf) in the resource

selldown?

For context, IOC shares are currently trading at approximately $0.85/Mcf on a

1P basis, which compares to a five-year South Pacific transaction average of around

$1.20/Mcf. (This is not our prediction of how much InterOil will receive for its gas – it’s just

a historical observation  .)

4. Will InterOil move forward with development of its own LNG project using its retained gas?

Papua New Guinea’s government would presumably be

supportive of such a project, in order to avoid the creation of a de facto LNG monopoly in

the country, but until the Exxon transaction is finalized, InterOil will not be in a position to

spell out its long-term strategy. 

The road ahead. The most important near-term catalyst will be a final deal announcement,

including whatever details of the economic terms will be released publicly. (The

government will, of course, have to approve the final deal.) After that is concluded,

Elk/Antelope appraisal drilling will ramp up (with Exxon covering the costs), after which an

updated resource estimate will be made. Concurrently, InterOil is in the process of hiring

its new CEO, though the company has made clear that a selldown deal is not dependent on

having a permanent CEO in place.

Smeltman- Welcome to the board . Your post.....very well done ! As to question # 3, price is specific ( I believe) to the NG. Please keep in the back of your mind that the condensates are going to bring in "mucho pesos " to add to our revenue .( At some point, should raise pps nicely) Good luck !

'smeltman' pid='23060' dateline='<a href="tel:1369478 Wrote:

Analysts: Pavel Molchanov & Alex Morris,

(Exploration and Production)

No Deal Yet, but Exclusive Talks Underway for Resource Selldown With XOM

Exxon and InterOil, in the same sentence. After a year and half of intense market

speculation about which multinational company it would sign a deal with, InterOil has

 

formally revealed that it is in exclusive negotiations with Exxon about a resource selldown.

This is consistent with management’s previous comments about receiving final bids from

major energy companies. The talks with Exxon are ongoing, so today’s news is not a final

deal announcement, but insofar as this news provides a blue chip “stamp of approval” –

from the world’s largest private-sector oil and gas company, no less – we think it’s a clear

incremental positive. In this context, it’s worth noting the 30% short interest in the stock –

and if you need any reminder on what that implies, take a look at the recent stock price

chart for Tesla. 

Here is what we know. InterOil plans to sell Exxon an interest in PRL 15 (the block which

includes the Elk/Antelope field) to supply gas for an additional train at the PNG LNG

project. This LNG facility will initially have capacity of 6.9 million tons per annum (mtpa),

comprised of two trains, and it is currently being built by a consortium led by Exxon and Oil

Search. Payments will be staged, and Exxon will fund additional delineation wells on the

acreage – a deal structure that is customary for these kinds of transactions. InterOil

maintains the option to develop its own LNG project, using the portion of its gas resource

which will be retained at Elk/Antelope as well as other fields such as Triceratops.

Here is what we do not know (yet). Today’s announcement was limited to identifying

Exxon. Here are the four major questions that have yet to be answered.

1. How much of the resource will be monetized?

As a general premise, in these kinds of transactions, the

“big brother” (Exxon in this case) tends to want to purchase more of the resource, and the

smaller partner tends to want to keep more for its own use.

2. What is the timeline for a final deal?

Just as management has (wisely) stayed away from self-imposing any

arbitrary deadlines in recent months, today’s press release did not specify any timetable.

3. Most importantly, what will be the multiple ($ per Mcf) in the resource

selldown?

For context, IOC shares are currently trading at approximately $0.85/Mcf on a

1P basis, which compares to a five-year South Pacific transaction average of around

$1.20/Mcf. (This is not our prediction of how much InterOil will receive for its gas – it’s just

a historical observation  .)

 

4. Will InterOil move forward with development of its own LNG project using its retained gas?

Papua New Guinea’s government would presumably be

supportive of such a project, in order to avoid the creation of a de facto LNG monopoly in

the country, but until the Exxon transaction is finalized, InterOil will not be in a position to

spell out its long-term strategy. 

The road ahead. The most important near-term catalyst will be a final deal announcement,

including whatever details of the economic terms will be released publicly. (The

government will, of course, have to approve the final deal.) After that is concluded,

Elk/Antelope appraisal drilling will ramp up (with Exxon covering the costs), after which an

updated resource estimate will be made. Concurrently, InterOil is in the process of hiring

its new CEO, though the company has made clear that a selldown deal is not dependent on

having a permanent CEO in place.

 One question: is it similarly industry practice to do a resource re-certification after drilling the delineation wells?  I think that phrase provided the excuse for selling among the weak hands?