What's changed when IOC was $106

[jft310]

At $106 we had exclusive talks with Exxon and assets at E/A , no deal just talks . No contract to deliver cash .

A government that didn't want an Exxon deal wanted a new Super Major .

Today in $40's we have

A deal signed with Total

We have a 30 percent interest in an LNG plant

More assets discovered at Raptor, Bobcat and Wahoo hydrocarbons

Backing of the government

Averaging the 2 reports GCA at 7.1 and GLJ at 9.1 we average 8.1 T's

The purpose of the new wells is to prove out the GLJ numbers .

Today we have a lower oil price that's true but no one thinks this lasts

As others cancel high priced contracts for new LNG plants the construction firms should be competitive on price .

Talk of a larger than PNGLNG plant

Interoil and partners spending a Billion dollars on seismics , drilling etc to find even more assets .

Stronger management team .

No more volatile refinery earnings

etc

Eventually the market will recognize the assets for what they are.

[Daveontb]

JFT, seem like you left out a few key points as to what has changed.

1. Unreasonable to reasonable expectations of the price for which gas can be sold for to a major.

2. A realization that we still have to enter into an agreement to be part owner of an LNG plant. Our shirt maybe handed to us again.

3. A realization that our deal with Total maybe negated by litigation and we may have to negotiate with Exxon to have a part ownership in a LNG plant.

4. A realization of how hard it will be to raise the capital to build an LNG plant in an enviroment  of $60 crude prices.

[ArtM72]

JFT, seem like you left out a few key points as to what has changed.

1. Unreasonable to reasonable expectations of the price for which gas can be sold for to a major.

2. A realization that we still have to enter into an agreement to be part owner of an LNG plant. Our shirt maybe handed to us again.

3. A realization that our deal with Total maybe negated by litigation and we may have to negotiate with Exxon to have a part ownership in a LNG plant.

4. A realization of how hard it will be to raise the capital to build an LNG plant in an enviroment  of $60 crude prices.

I don't understand #2 and #3 above.  The agreement outlining IOC's ownership  is signed with Total, is it not?  And the only way OSH can win in arbitration is for OSH to deliver as consideration a 30%+/- IOC ownership in an LNG plant otherwise they will not have matched the Total offer and any other issue that may be on the table is of no consequence.

Your thinking though is interesting because, if honest, suggests a very good if very invalid reason why IOC's price is where it is: the market simply doesn't understand the true situation.

Please, feel free to contradict those points as they seem rock solid in my understanding.

As to your #1 and #4, I suspect those points are moot.  Given the production cost of tar sands and other non-conventional oil, and the revenue needs of OPEC countries, $60 won't stick around for long.

[Daveontb]

Art,

The company has not made public an agreement with Total to build a LNG plant.  Thus, my statement that IOC does not have such agreement. (The press release last year announcing the agreement with Total inferred one. However, no contract, which would be very material, has ever been released and I confirmed with IOC management that no such contract has been negotiated or executed.) Not positive, but I believe one of Hession's stated goals in his employment agreement is to negotiate such contract.  Number 3 follows from #2.

i understand you comment about #1 and #4. Yes, $60 pice won't stick, but it could be with us for a year, two years. If so, it will be a very hard market to raise the required debt funding to do the deal. Thus, a further delay in the project.

[2126]

The response to all of these 4 points was made clear by the latest Bernstein Research report following their site visit to IOC holdings in PNG late fall.

1. This point is moot, although there are still residual effects of the market not fully grasping the significance of the overall TOTAL/IOC deal, particularly the fact that IOC will have a 30% share of the LNG plant.

2. IOC IS in an agreement to develop a LNG plant. The agreement is with TOTAL and is an SPA (Share Purchase Agreement) that can be found on the IOC website. That agreement is in effect and TOTAL has paid IOC over $400 million in the first of many payments under the agreement. TOTAL will also pay up to $50 million of the cost of each of the Antelope appraisal wells under that agreement, as well as currently working with IOC teams to evaluate design concepts for the plant. While it is true that there are further steps to take before a plant will begin construction (Resource certification and payments, FEED, FID, etc.) these are all encompassed under both the SPA and the JOA between TOTAL/IOC. There is no further agreement to sign. All of the details of the ongoing relationship between TOTAL and IOC are in the SPA and the JOA. (Joint Operating Agreement--that we do not have access to).

3. While it is possible, but unlikely, that the TOTAL/IOC SPA will be negated by a decision regarding the current completed arbitration process, IOC will NOT have to negotiate with OSH or EXXON or anyone else should IOC lose the arbitration. OSH (or possibly EXXON, if OSH can somehow sell its interest in PRL 15 to EXXON AND somehow EXXON can convince the PNG government to waive the govt's long-standing demand that there be 2 super majors involved in PNG gas development) still must match the TOTAL deal in all respects. Nothing is negotiable. IF IOC loses arbitration AND OSH/EXXON do not match the deal, the TOTAL/IOC deal stands. Pre-emptive rights are nothing more than the right to match another's deal.

4. If anything, it will be easier in today's environment to raise funds to build a LNG plant where the feedstock price is as low as IOCs. The large bank consortium that joined forces to back the $300 million credit facility to IOC earlier this year would jump at an opportunity to fund an LNG plant with low-cost gas at the gateway to the largest future gas purchasing countries in the world. Additionally, Japan and/or Korea would also be very interested in funding an LNG plant with an agreement to purchase the LNG under a long-term contract. The low price of oil right now has removed hundreds of projects worldwide from funding consideration, but NOT cost-effective LNG plants. They have only moved up higher on the funding priority list. Bankers are always looking for solid long-term loan projects and the Gulf LNG plant project will have no trouble receiving funding.

I do agree with Art however, that this confusion surrounding these key issues has had a distinct negative impact on the understanding of how good a position IOC is in. If you read through the various analyst and research reports on IOC over the past year (Bernstein, Morgan Stanley, Credit Suisse, Raymond James) you can get a deep understanding of the actual position that IOC is in with regards to the upcoming plant. Two world-class analyses of the gas in place at E/A (GLC and GCA) have held that they have enough to fuel a 2-train LNG plant. The new seismic seems to indicate that IOC probably has more gas than even those estimates, while the Ant 4 and 5 wells will only add to, and not detract from, the estimates (in my opinion).

I feel that this current price drop is due not so much to market forces than to manipulation of the share price for reasons unrelated to the actual IOC situation.

[admin]

Thanks for clearing that up, 2126

[jdeo1969]

The response to all of these 4 points was made clear by the latest Bernstein Research report following their site visit to IOC holdings in PNG late fall. 1. This point is moot, although there are still residual effects of the market not fully grasping the significance of the overall TOTAL/IOC deal, particularly the fact that IOC will have a 30% share of the LNG plant. 2. IOC IS in an agreement to develop a LNG plant. The agreement is with TOTAL and is an SPA (Share Purchase Agreement) that can be found on the IOC website. That agreement is in effect and TOTAL has paid IOC over $400 million in the first of many payments under the agreement. TOTAL will also pay up to $50 million of the cost of each of the Antelope appraisal wells under that agreement, as well as currently working with IOC teams to evaluate design concepts for the plant. While it is true that there are further steps to take before a plant will begin construction (Resource certification and payments, FEED, FID, etc.) these are all encompassed under both the SPA and the JOA between TOTAL/IOC. There is no further agreement to sign. All of the details of the ongoing relationship between TOTAL and IOC are in the SPA and the JOA. (Joint Operating Agreement--that we do not have access to). 3. While it is possible, but unlikely, that the TOTAL/IOC SPA will be negated by a decision regarding the current completed arbitration process, IOC will NOT have to negotiate with OSH or EXXON or anyone else should IOC lose the arbitration. OSH (or possibly EXXON, if OSH can somehow sell its interest in PRL 15 to EXXON AND somehow EXXON can convince the PNG government to waive the govt's long-standing demand that there be 2 super majors involved in PNG gas development) still must match the TOTAL deal in all respects. Nothing is negotiable. IF IOC loses arbitration AND OSH/EXXON do not match the deal, the TOTAL/IOC deal stands. Pre-emptive rights are nothing more than the right to match another's deal. 4. If anything, it will be easier in today's environment to raise funds to build a LNG plant where the feedstock price is as low as IOCs. The large bank consortium that joined forces to back the $300 million credit facility to IOC earlier this year would jump at an opportunity to fund an LNG plant with low-cost gas at the gateway to the largest future gas purchasing countries in the world. Additionally, Japan and/or Korea would also be very interested in funding an LNG plant with an agreement to purchase the LNG under a long-term contract. The low price of oil right now has removed hundreds of projects worldwide from funding consideration, but NOT cost-effective LNG plants. They have only moved up higher on the funding priority list. Bankers are always looking for solid long-term loan projects and the Gulf LNG plant project will have no trouble receiving funding. I do agree with Art however, that this confusion surrounding these key issues has had a distinct negative impact on the understanding of how good a position IOC is in. If you read through the various analyst and research reports on IOC over the past year (Bernstein, Morgan Stanley, Credit Suisse, Raymond James) you can get a deep understanding of the actual position that IOC is in with regards to the upcoming plant. Two world-class analyses of the gas in place at E/A (GLC and GCA) have held that they have enough to fuel a 2-train LNG plant. The new seismic seems to indicate that IOC probably has more gas than even those estimates, while the Ant 4 and 5 wells will only add to, and not detract from, the estimates (in my opinion). I feel that this current price drop is due not so much to market forces than to manipulation of the share price for reasons unrelated to the actual IOC situation.

This is a very informative post.  I might add that if IOC's assets were not coveted, wouldn;t OSH simply drop the suit and move on?  I have much pent up frustration as is documented recently, but this fact is undeniable.  I'm just not wanting to wait forever for a payday, but there is no question IOC is ultimately in a good position, share price be damned.

[Daveontb]

That for highlighting that the joint operating agreement is not public. That is the issue. The agreement might read that "the parties will use best efforts to reach a mutual agreement on the construction on an LNG plant wherein IOC will have a 30% interest." (Rephrased, only an agreement to talk.) Alternatively, it could be an 100 page contract documenting all the details. You don't know. I don't know. I do know that one member of management when asked directly told me no such document exists.

I do know that in the proposed 2013 compensation plan for Hession words specifically reference  "a binding sale and purchase agreement for the sale and purchase of a working interest of not less than 30% of PRL 15". However, no "binding agreement" words were used when saying payments will be upon the "achievements of certain defined stages in the construction and development of certain LNG projects in which InterOil holds an equity interest." In fact, it implies to me that no payment will be made if IOC does not hold an equity interest. Why the need to clarify no payment in the event IOC does not have an equity interest? Why are the lawyer not as straight forward saying the payment will be made pursuant to a binding contract? Might it be the press release in December of 2013 was rushed and incorrectly implied that a JOA had been signed versus that a gentleman's agreement had be reached to move forward with each other.

As to the ease of funding the project, time will tell.

jFT's post highlighted all is roses as compared to last year. I am just highlighting risks that exist. You may think they don't exist. But the market might.

[2126]

Under Section 3.10 of the SPA, the TOTAL and IOC agreement regarding the NEW JOA are spelled out:

"3.10 New PRL 15 JOA
The parties record their preference that the New PRL IS lOA govern petroleum operations in respect of the PRL IS Title in lieu of the PRL I5 JOA. Each party shall procure that its Related Bodies Corporate shall execute the New PRL IS lOA to govern petroleum operations in respect of the PRL IS Title as soon as reasonably practicable following execution of this Agreement." These statements are part of a binding agreement between TOTAL and IOC (actually its wholly owned subsidiary SPI 208) as of March 26th,  2014 (not as of December 13, 2013 as you imply in your reference to the PR of that date).

Definition on page 7 of SPA, under Section 1.1 Definitions:  "New PRL 15 JOA" means the draft Joint Operating Agreement contained in Annex 4." Annex 4 of the SPA (Page 75 of SPA) has signatures of the principals of both TOTAL and IOC, although the actual JOA is not attached to the publicly-released SPA. This is not in any way unusual and is certainly no reason to assume that there is no JOA. In fact, the fact that the publicly-released SPA refers specifically to the NEW JOA is a clear indication that such a document exists. If a JOA did not, in fact, exist, such referral to same in the SPA could easily be construed as a statement 'misleading to the public regarding a material fact', and would never have gotten past the various teams of lawyers that vetted the TOTAL/IOC SPA. Any assumption that there is no New JOA is not based on any publicly-known fact and is beyond rational speculation.

Additionally, as stated in the SPA: TOTAL and IOC agreed that one of the key elements of the SPA (mentioned in the paragraph regarding the Interim Resource Payments and FID payments) is "the parties' objective to reach FID in the shortest practicable timeframe." Reference: TOTAL/IOC SPA, Paragraph 6.1(b).

I'm not sure why any of this is still being debated....and if you have a written statement from management that the JOA does not exist, please release it.

[admin]

Once again, thanks for clearing that up