Shell is likely about to bid for InterOil, but will it be better than the Exxon SPA?

[Resourcearb]

InterOil’s exclusive negotiations with XOM will almost certainly result in closure of an SPA this month.  Though Shell and at least 3 other final bidders cannot reenter the original bidding process for a stake in PRL 15, they have a very brief window in which to submit bids for the entire company to InterOil’s Board of Directors before the Exxon deal closes and InterOil’s stock appreciates significantly.

In addition to all of the reasons I’ve previously articulated for which Shell will bid for InterOil as well as indications from channels in Port Moresby of Shell’s continued interest, the resistance Shell is facing in Australia to its $12 billion Prelude floating LNG project in Australia creates an immediate incentive to establish an alternative location to Australia in which to develop floating LNG capacity.  As the following article indicates (http://au.news.yahoo.com/thewest/a/-/wa/17833405/shell-boss-defends-floating-lng/), “Premier Colin Barnett has strongly opposed the use of floating LNG technology on offshore WA oil and gas projects, arguing it will cost local jobs, deny benefits to indigenous groups and cost the State royalties”.  Floating LNG is a substantial part of Shell’s vision for LNG production growth, and its dependence on Australia for floating LNG projects provides significant leverage to politicians like Premier Colin Barnett in resisting Shell.  If Shell could immediately begin to develop a floating LNG project off PNG’s Gulf underpinned by Elk/Antelope, it may convince Australian politicians that rather than forcing Shell to build conventional LNG liquefaction capacity for already high cost projects in Australia, their resistance is causing Shell to contribute its resource and job creation opportunities to other countries.  There are very few projects like InterOil’s with developed low cost natural gas resources in jurisdictions that would be open to Shell’s proposal to develop floating LNG. 

Shell has a golden opportunity to try to acquire InterOil now, as the confusion around InterOil’s SPA with Exxon will soon be clarified and investors will realize the brilliance of this deal for InterOil.  The deal encompasses XOM taking virtually all the risk (the purchase of 4.6 Tcf is not contingent on recertification, there will be substantial staged payments to IOC prior to production, XOM’s discussions with PNG LNG partners will commence only after a binding SPA with IOC is consummated), it provides InterOil with sufficient cash to “cover [its] share of infrastructure costs and fund exploration” (including a multiple rig drilling program, a pipeline to the Gulf coast, a gathering system, and a CSP), and it provides for an XOM funded appraisal program that could increase the size of the resource in Elk/Antelope to in excess of 12 Tcf with delineation across the east-west section of the structure to prove out the seismic interpretation (hence retroactively reducing IOC’s dilution to PRL 15).  Most importantly, it establishes a floor valuation (I believe at least 2X the current market cap) that will immediately be enhanced by the stepped up NAV associated with monetizing the Gulf Province option, which I believe is worth in excess of $3 per mcf under even the most negative scenario.  InterOil’s retention of the Gulf option provides an immediate path to a subsequent sell-down or partnership with a major operator at a much higher valuation than the initial XOM SPA.  The deal will value InterOil’s PRL 15 at a much higher valuation than, for example, $1.50 of cash on 10 Tcfe (almost 3X the current share price), as the retained Gulf option is the crown jewel of the transaction and holds an NAV of >$200 per share net to InterOil by itself.

InterOil’s stock currently reflects no value for any gas or condensate resources beyond the 4.6 Tcf being sold to XOM – it doesn’t include the additional 1-2 trains of LNG capacity that Elk/Antelope will underpin, the massive Triceratops structure, or any value for InterOil’s 3 coveted PPL’s.  Meanwhile, continued production and development issues in Australia, high crude prices, and strong demand has resulted in a very strong LNG picture.  The following article (http://www.reuters.com/article/2013/07/03/column-russell-china-gas-idUSL3N0F904C20130703), which indicates that China’s move to increase gas charges will boost demand, reports that China paid Qatar $18.77 per mmBtu for LNG in May and that “the seven LNG plants under construction in Australia will also be selling at higher, oil-linked prices, when they come on stream”.

With several hundred dollars a share in assets, a new CEO coming on board imminently, and the XOM deal almost certainly closing this month, InterOil is about to be materially and permanently revalued.  Shell recognizes this, and there is a high probability that it will finally make a run at InterOil.

[Tree]

Take over bids coming?  Maybe.  A Shell bid won't be driven by FLNG though.

Shell will never place a 'world's largest ship' in the friendly waters of Gulf Province and pipe E/A gas to it.

Stick built Gulf Plant will be a fraction of the FLNG cost.

I like where we are now - butt deep in legal work defining a 1500 page SPA based on an XOM template which by design favors XOM in every sentence.  The challenge is for XOM, PAC LNG, PNG and IOC legal teams to protect their seperate interests with exact wording all can agree upon.  That takes a little time and that time is running out.

There will be double digit million ton production from multiple trains fed from PRL15 and Tri which IOC will have ownership stakes.  Location of those trains is unknown today but the resource and LNG market will ensure the trains will be built.

[Resourcearb]

Another important component of the near-term explosiveness of InterOil is the pervasive political and operational turmoil in the LNG industry.  Chaos in Egypt and Syria has resulted in a rapid recent rise in crude oil, bolstering the spot price of crude linked LNG contracts.  Importantly, in 2010, Egypt exported 7.1 MMtpa of LNG, accounting for 3% of gobal exports.  Qatar, the world’s largest LNG exporter, is now undergoing a leadership transition after 18 years and is vulnerable to spreading uprisings in the region.  “Nigeria’s export of gas has suffered a major setback as the Nigeria Liquefied Natural Gas (NLNG) said yesterday it had declared force majeure on its exports of liquefied natural gas as a blockade by the Nigerian Maritime Administration and Safety Agency (NIMASA) over a tax dispute, which entered its second week.” (http://www.thisdaylive.com/articles/nlng-declares-force-majeure-over-nimasa-s-blockade/152152/)  Nigeria accounted for 18% of LNG exports in 2010.

By contrast, PNG has entered a very constructive and well controlled political era under PM Peter O’Neill and the country is far from the Middle East.  The LNG landscape is materially improving, and with continued problems in Australia (including Woodside’s reduced production guidance last night), InterOil is about to have a big thematic tailwind to complement the transformational Exxon deal, which is close to being closed and announced.

[Stavros]

Take over bids coming?  Maybe.  A Shell bid won't be driven by FLNG though.

Shell will never place a 'world's largest ship' in the friendly waters of Gulf Province and pipe E/A gas to it.

Stick built Gulf Plant will be a fraction of the FLNG cost.

I like where we are now - butt deep in legal work defining a 1500 page SPA based on an XOM template which by design favors XOM in every sentence.  The challenge is for XOM, PAC LNG, PNG and IOC legal teams to protect their seperate interests with exact wording all can agree upon.  That takes a little time and that time is running out.

There will be double digit million ton production from multiple trains fed from PRL15 and Tri which IOC will have ownership stakes.  Location of those trains is unknown today but the resource and LNG market will ensure the trains will be built.

Tree:

I respectfully strongly disagree with your statement that the "" XOM template which by design favors XOM in every sentence."

1. IOC has IB's representing them who get higher fees the better the deal is.
2. IOC is the seller who has the verified goods available on ths shelf for sale
3. XOM is the hungry buyer who does not have nearly enogh gas to underpin their 3rd train, never mind #4

Ergo XOM and IOC are negotiating on equal footing at best, but to my opinion the negotiations have probably favored IOC from the beginning.

[Tree]

Take over bids coming?  Maybe.  A Shell bid won't be driven by FLNG though.

Shell will never place a 'world's largest ship' in the friendly waters of Gulf Province and pipe E/A gas to it.

Stick built Gulf Plant will be a fraction of the FLNG cost.

I like where we are now - butt deep in legal work defining a 1500 page SPA based on an XOM template which by design favors XOM in every sentence.  The challenge is for XOM, PAC LNG, PNG and IOC legal teams to protect their seperate interests with exact wording all can agree upon.  That takes a little time and that time is running out.

There will be double digit million ton production from multiple trains fed from PRL15 and Tri which IOC will have ownership stakes.  Location of those trains is unknown today but the resource and LNG market will ensure the trains will be built.

Tree:

I respectfully strongly disagree with your statement that the "" XOM template which by design favors XOM in every sentence."

1. IOC has IB's representing them who get higher fees the better the deal is.
2. IOC is the seller who has the verified goods available on ths shelf for sale
3. XOM is the hungry buyer who does not have nearly enogh gas to underpin their 3rd train, never mind #4

Ergo XOM and IOC are negotiating on equal footing at best, but to my opinion the negotiations have probably favored IOC from the beginning.

" XOM template which by design favors XOM in every sentence."

Agree or not, your choice.  There is an XOM template.  The XOM template speeds up the SPA draft.  1500 page documents do not begin new each time.  The specifics are worked into accepted templates.

XOM template ---->adapted to E/A transaction specifics------->requiring tedious legal exactness---->protecting all parties involved = avoiding mistakes or gray areas which can cost IOC tens of millions or even more.

Agree on your 1,2,3.   I'm confident all agree on 1,2,3 as they are self evident.

" XOM template which by design favors XOM in every sentence."

[Palm]

When you deal with an XOM you use their agreements which must be gone over with a fine-tooth comb.  Huge documents which favor them in every way. You better have a good team going through them and negotiating important terms, and be sure if you are negotiating for a just EA it doesn't say "PRL 15" for instance. And then be sure all 40 places it says "PRL 15" (for instance) it gets changed to EA.  No just ,"Sign zee papas" with these docs.  This is where IOC's legal beagles earn their keep.

[Stavros]

Well Palm, with Find/ Replace it takes about 10 seconds to ensure the correct references are in place.

I don't know who IOC/ Pac LNG are using this time for legal reviews, but in the past they used an excellent law firm ... "King & Spaulding" ... who have a track record of very smart deal-making for their energy clients.

K&S have SPA templates for LNG as well.

http://www.kslaw.com/News-and-Insights/NewsDetail?us_nsc_id=5855

So it's open to debate as to whether they started with XOM or IOC's SPA.
You and Tree could be right OR wrong.
You have no proof, nor do I.

What all three of us know and agree on is that XOM will not I repeat WILL NOT be taking advantage of IOC in any way, shape or form.
XOM has already capitulated to IOC/ Pac LNG's non-negotiable points.

The announcements covering IOC's new CEO and the XOM Agreement are coming NOOS.

Bink is happy

[Palm]

But we know from the AGM that management stated XOM documents were being used and very carefully being reviewed by IOC's team of attorneys.  I do hope they include K&S as they are very good at what they do.  And Red Raider Phillip Weems is one of their main guys.

[ArtM72]

Let's not forget leaders of the host country have said their previous experience with PNG LNG included errors that they were determined not to repeat. I would also suspect that while XOM has their own preferred "boilerplate" for contracts a good part of those T&Cs are based on international law. Then you have the bidding process that led to the signed term sheet which was determined to have consideration acting towards IOC's best advantage.

All of which contributes to my belief these contract documents are long and complex. While XOM may come in to the final drafting with certain strengths due to their size and experience, to state that they alone have or will dictate all terms according to their exclusive advantage is a statement that simply can't ring true.

[Palm]

I don't think that anyone is saying XOM is necessarily dictating terms, just that their standard docs are what is being used.  If you're going to do business with XOM, they put the agreed upon terms into their standard docs, then begins the tedious process of making sure everything is in that doc as agreed by both parties.  We know that the major terms were agreed to and the spec sheet was the first step in getting to a final set of agreed-upon deal documents.  Don't know what those terms are, but have heard that XOM presented the first set of deal documents on their "standard" docs.  Then the legals comb through and look for anything which needs to be changed to get it right.