New Deal vs. Appellate Court Decision

[2126]

I thought it might be useful to look at how the new Exxon/IOC deal was put together to minimally address the concerns of the Canadian Appellate Court. I have listed what I think were the main concerns outlined in the court's decision and then added what little IOC has related to its shareholders regarding how it 'improved' the deal to comply with the court's issues.

The Appellate Court listed a number of factors which they characterized as "red flags'"

"Given the ‘red flags’ in this case –

• the absence of a fairness opinion from an independent expert,
• the failure of Morgan Stanley to assess the value of the CRP as compared with the value of the PRL prospects (again, the company’s primary asset);
• the deficiencies pointed out by Mr. Dey;
• the unchallenged report of Mr. Booth;
• the fact the CEO was in a position of conflict;
• the probability the “independent” special committee was not independent of management; and
• the lack of “necessity” for the deal."

IOC clearly has tried to address these various issues in a cursory fashion as follows:

• IOC has obtained a fairness opinion from an independent expert: BMO Nesbitt Burns Inc., dated as of December 14, 2016
• We do not know if BMO has assessed the value of the CRP as compared to the value of the PRL prospects. We may find out more relevant information in the new MIC, due mid-January. Additionally, IOC has attempted to address this issue by obtaining a new resource estimate from GLJ which reduced the P50 estimate from 10.4 Tcfe to 7.8 Tcfe. Finally, Exxon has raised the cap on the CRP to 11 Tcfe. [See below under Report of Mr. Booth.]
• The deficiencies noted by Mr. Dey [who was former chair of the Ontario Securities Commission and also former Chairman of Morgan Stanley] were that:the “process undertaken by this board in considering and recommending the Transaction … was deficient, and failed to meet current governance best practice and to ensure adequate safeguards of shareholder interests.” (At para. 27 in the lower court decision.) He [Mr. Dey} contrasted the fairness opinion of Morgan Stanley with three others with which he was familiar, each of which provided a great deal more information – and one might say, substance – than the opinion in this case."
  
  • Again we do not know if the BMO opinion will have more information and more substance than the MS opinion. All we know is that it was an "independent" report.
• The unchallenged report of Mr. Booth refers to the report by Paradigm Capital, which the Appellate Court noted stated that the deal was “inadequate, from a financial point of view, to the shareholders of InterOil.” (Appellate Court emphasis.)
  
  • In the Paradigm Capital report, which was noted in the lower court decision, it is stated that: "The appropriate estimate for the resource size, which, as per our assumptions outlined above, should be a minimum of 10 Tcfe; we note that:
    
    • i) the structure of the Transaction, specifically the cap on the CRP at 10 Tcfe, significantly constrains potential InterOil shareholder value; and
    • ii) the Consideration is below the floor implied by the lower range of the selected precedent transactions based on GLJ’s resource estimate as at December 31, 2015;
      
      • b) the completion of the Antelope 7 well, which can reasonably be expected to result in an increase to the Elk-Antelope 2C resource at the certification date;
      • we note that: i) research analysts generally postulate that the completion of the Antelope 7 well could increase the Elk-Antelope 2C resource by an incremental 1.5 Tcfe (independent of any specific evaluator), Re: Interoil Corporation, 2016 YKSC 54 Page 14 which derives a Elk-Antelope 2C certification range of 10 Tcfe to 11.5 Tcfe.
  • THE IOC respose to this report is to 1] have Exxon raise the CRP Cap to 11 Tcfe, 2] have GLJ lower its midrange estimate to 7.8 Tcfe [still unexplained how this new estimate was arrived at], and 3] obtain a new independent fairness opinion from BMO.
• The fact that the CEO was in a position of conflict has not in any public way been addressed at all.
• The probability that the "independent" special committee was not independent of management was addressed by IOC by constituting a new "fairness committee" comprised of those 4 members of the IOC BOD with the least public connections to Mr. Hession.
• The lack of 'neccessity' for the deal has not been addressed at all by the information that we have received so far.

In all, it appears that IOC has attempted to do as little as possible to enhance the deal for the benefit of the shareholders and has only done the minimal that its legal counsel must deem necessary to obtain lower court approval. Some of these questions will perhaps be better answered in the MIC, but only if the new BMO opinion provides much more detail regarding how it reached the conclusion that this new deal is now 'fair and reasonable', when most issues argue for the opposite conclusion:

• the GLJ report has lowered the resource estimate,
• the Exxon share price is now significantly higher than it would have been at the earlier closing date, thus giving IOC shareholders approximately 10% less value in the stock swap.
• the prices of both oil and natural gas have increased significantly since the initial Exxon/IOC deal was approved by the BOD, and
• the new deal is, in all relevant particulars, identical to the old "unfair and unreasonable" deal, save for the increase in the CRP cap.

Sorry, but so far, the new deal does not pass the 'smell' test. It is a patently obvious attempt to make the absolute least possible cursory adjustments to the old deal to allow it to pass muster with the Yukon courts. Since the Appellate Court decision, I have renewed faith in the Canadian court system. I hope that they can see this new deal for what it remains--not at all fair and reasonable to IOC shareholders.

[MartiniStocks9756]

2126 whole heartedly agree. Thanks for all your analysis and effort here. Probably a lot more trouble for you than the BOD to give a one TCF boost to the CRP.

As I have said before if they get away with this the system is not in favor of the retail investor at all.

I hope to dissent but my RJ brokers do not seem to be able to figure out how that may happen.

[johnwgrant]

So, was IOC management lying to us when they said that the mid-case was 10.4TCFe, or, are they lying now when they say it is 7.8 ???

I would like to hear that smooth-talking Hession explain that - with a sharp person like PetrEng1 to catch his twists and contradictions !!!

[MartiniStocks9756]

Seems as though we have been lied to since our fine CEO took over. But complaining is not going to fix it. We need help in the courts again.

[admin]

Great work, 2126!

[sageo]

I thought it might be useful to look at how the new Exxon/IOC deal was put together to minimally address the concerns of the Canadian Appellate Court. I have listed what I think were the main concerns outlined in the court's decision and then added what little IOC has related to its shareholders regarding how it 'improved' the deal to comply with the court's issues.

The Appellate Court listed a number of factors which they characterized as "red flags'"

"Given the ‘red flags’ in this case –

• the absence of a fairness opinion from an independent expert,
• the failure of Morgan Stanley to assess the value of the CRP as compared with the value of the PRL prospects (again, the company’s primary asset);
• the deficiencies pointed out by Mr. Dey;
• the unchallenged report of Mr. Booth;
• the fact the CEO was in a position of conflict;
• the probability the “independent” special committee was not independent of management; and
• the lack of “necessity” for the deal."

IOC clearly has tried to address these various issues in a cursory fashion as follows:

• IOC has obtained a fairness opinion from an independent expert: BMO Nesbitt Burns Inc., dated as of December 14, 2016
• We do not know if BMO has assessed the value of the CRP as compared to the value of the PRL prospects. We may find out more relevant information in the new MIC, due mid-January. Additionally, IOC has attempted to address this issue by obtaining a new resource estimate from GLJ which reduced the P50 estimate from 10.4 Tcfe to 7.8 Tcfe. Finally, Exxon has raised the cap on the CRP to 11 Tcfe. [See below under Report of Mr. Booth.]
• The deficiencies noted by Mr. Dey [who was former chair of the Ontario Securities Commission and also former Chairman of Morgan Stanley] were that:the “process undertaken by this board in considering and recommending the Transaction … was deficient, and failed to meet current governance best practice and to ensure adequate safeguards of shareholder interests.” (At para. 27 in the lower court decision.) He [Mr. Dey} contrasted the fairness opinion of Morgan Stanley with three others with which he was familiar, each of which provided a great deal more information – and one might say, substance – than the opinion in this case."
  
  • Again we do not know if the BMO opinion will have more information and more substance than the MS opinion. All we know is that it was an "independent" report.
• The unchallenged report of Mr. Booth refers to the report by Paradigm Capital, which the Appellate Court noted stated that the deal was “inadequate, from a financial point of view, to the shareholders of InterOil.” (Appellate Court emphasis.)
  
  • In the Paradigm Capital report, which was noted in the lower court decision, it is stated that: "The appropriate estimate for the resource size, which, as per our assumptions outlined above, should be a minimum of 10 Tcfe; we note that:
    
    • i) the structure of the Transaction, specifically the cap on the CRP at 10 Tcfe, significantly constrains potential InterOil shareholder value; and
    • ii) the Consideration is below the floor implied by the lower range of the selected precedent transactions based on GLJ’s resource estimate as at December 31, 2015;
      
      • b) the completion of the Antelope 7 well, which can reasonably be expected to result in an increase to the Elk-Antelope 2C resource at the certification date;
      • we note that: i) research analysts generally postulate that the completion of the Antelope 7 well could increase the Elk-Antelope 2C resource by an incremental 1.5 Tcfe (independent of any specific evaluator), Re: Interoil Corporation, 2016 YKSC 54 Page 14 which derives a Elk-Antelope 2C certification range of 10 Tcfe to 11.5 Tcfe.
  • THE IOC respose to this report is to 1] have Exxon raise the CRP Cap to 11 Tcfe, 2] have GLJ lower its midrange estimate to 7.8 Tcfe [still unexplained how this new estimate was arrived at], and 3] obtain a new independent fairness opinion from BMO.
• The fact that the CEO was in a position of conflict has not in any public way been addressed at all.
• The probability that the "independent" special committee was not independent of management was addressed by IOC by constituting a new "fairness committee" comprised of those 4 members of the IOC BOD with the least public connections to Mr. Hession.
• The lack of 'neccessity' for the deal has not been addressed at all by the information that we have received so far.

In all, it appears that IOC has attempted to do as little as possible to enhance the deal for the benefit of the shareholders and has only done the minimal that its legal counsel must deem necessary to obtain lower court approval. Some of these questions will perhaps be better answered in the MIC, but only if the new BMO opinion provides much more detail regarding how it reached the conclusion that this new deal is now 'fair and reasonable', when most issues argue for the opposite conclusion:

• the GLJ report has lowered the resource estimate,
• the Exxon share price is now significantly higher than it would have been at the earlier closing date, thus giving IOC shareholders approximately 10% less value in the stock swap.
• the prices of both oil and natural gas have increased significantly since the initial Exxon/IOC deal was approved by the BOD, and
• the new deal is, in all relevant particulars, identical to the old "unfair and unreasonable" deal, save for the increase in the CRP cap.

Sorry, but so far, the new deal does not pass the 'smell' test. It is a patently obvious attempt to make the absolute least possible cursory adjustments to the old deal to allow it to pass muster with the Yukon courts. Since the Appellate Court decision, I have renewed faith in the Canadian court system. I hope that they can see this new deal for what it remains--not at all fair and reasonable to IOC shareholders.

  Thanks 2126 . "But so far,the new deal does not pass the ' smell ' test . How true your words are !!

[Kaliboo]

I thought it might be useful to look at how the new Exxon/IOC deal was put together to minimally address the concerns of the Canadian Appellate Court. I have listed what I think were the main concerns outlined in the court's decision and then added what little IOC has related to its shareholders regarding how it 'improved' the deal to comply with the court's issues.

The Appellate Court listed a number of factors which they characterized as "red flags'"

"Given the ‘red flags’ in this case –

• the absence of a fairness opinion from an independent expert,
• the failure of Morgan Stanley to assess the value of the CRP as compared with the value of the PRL prospects (again, the company’s primary asset);
• the deficiencies pointed out by Mr. Dey;
• the unchallenged report of Mr. Booth;
• the fact the CEO was in a position of conflict;
• the probability the “independent” special committee was not independent of management; and
• the lack of “necessity” for the deal."

IOC clearly has tried to address these various issues in a cursory fashion as follows:

• IOC has obtained a fairness opinion from an independent expert: BMO Nesbitt Burns Inc., dated as of December 14, 2016
• We do not know if BMO has assessed the value of the CRP as compared to the value of the PRL prospects. We may find out more relevant information in the new MIC, due mid-January. Additionally, IOC has attempted to address this issue by obtaining a new resource estimate from GLJ which reduced the P50 estimate from 10.4 Tcfe to 7.8 Tcfe. Finally, Exxon has raised the cap on the CRP to 11 Tcfe. [See below under Report of Mr. Booth.]
• The deficiencies noted by Mr. Dey [who was former chair of the Ontario Securities Commission and also former Chairman of Morgan Stanley] were that:the “process undertaken by this board in considering and recommending the Transaction … was deficient, and failed to meet current governance best practice and to ensure adequate safeguards of shareholder interests.” (At para. 27 in the lower court decision.) He [Mr. Dey} contrasted the fairness opinion of Morgan Stanley with three others with which he was familiar, each of which provided a great deal more information – and one might say, substance – than the opinion in this case."
  
  • Again we do not know if the BMO opinion will have more information and more substance than the MS opinion. All we know is that it was an "independent" report.
• The unchallenged report of Mr. Booth refers to the report by Paradigm Capital, which the Appellate Court noted stated that the deal was “inadequate, from a financial point of view, to the shareholders of InterOil.” (Appellate Court emphasis.)
  
  • In the Paradigm Capital report, which was noted in the lower court decision, it is stated that: "The appropriate estimate for the resource size, which, as per our assumptions outlined above, should be a minimum of 10 Tcfe; we note that:
    
    • i) the structure of the Transaction, specifically the cap on the CRP at 10 Tcfe, significantly constrains potential InterOil shareholder value; and
    • ii) the Consideration is below the floor implied by the lower range of the selected precedent transactions based on GLJ’s resource estimate as at December 31, 2015;
      
      • b) the completion of the Antelope 7 well, which can reasonably be expected to result in an increase to the Elk-Antelope 2C resource at the certification date;
      • we note that: i) research analysts generally postulate that the completion of the Antelope 7 well could increase the Elk-Antelope 2C resource by an incremental 1.5 Tcfe (independent of any specific evaluator), Re: Interoil Corporation, 2016 YKSC 54 Page 14 which derives a Elk-Antelope 2C certification range of 10 Tcfe to 11.5 Tcfe.
  • THE IOC respose to this report is to 1] have Exxon raise the CRP Cap to 11 Tcfe, 2] have GLJ lower its midrange estimate to 7.8 Tcfe [still unexplained how this new estimate was arrived at], and 3] obtain a new independent fairness opinion from BMO.
• The fact that the CEO was in a position of conflict has not in any public way been addressed at all.
• The probability that the "independent" special committee was not independent of management was addressed by IOC by constituting a new "fairness committee" comprised of those 4 members of the IOC BOD with the least public connections to Mr. Hession.
• The lack of 'neccessity' for the deal has not been addressed at all by the information that we have received so far.

In all, it appears that IOC has attempted to do as little as possible to enhance the deal for the benefit of the shareholders and has only done the minimal that its legal counsel must deem necessary to obtain lower court approval. Some of these questions will perhaps be better answered in the MIC, but only if the new BMO opinion provides much more detail regarding how it reached the conclusion that this new deal is now 'fair and reasonable', when most issues argue for the opposite conclusion:

• the GLJ report has lowered the resource estimate,
• the Exxon share price is now significantly higher than it would have been at the earlier closing date, thus giving IOC shareholders approximately 10% less value in the stock swap.
• the prices of both oil and natural gas have increased significantly since the initial Exxon/IOC deal was approved by the BOD, and
• the new deal is, in all relevant particulars, identical to the old "unfair and unreasonable" deal, save for the increase in the CRP cap.

Sorry, but so far, the new deal does not pass the 'smell' test. It is a patently obvious attempt to make the absolute least possible cursory adjustments to the old deal to allow it to pass muster with the Yukon courts. Since the Appellate Court decision, I have renewed faith in the Canadian court system. I hope that they can see this new deal for what it remains--not at all fair and reasonable to IOC shareholders.

  2126,  The XOM offer is a fixed price - $45 - paid in XOM shares.  So we are not getting any different value in the new offer than in the last offer.  IT's the same.  What will be different is the number of shares we get.  But we can rest assured that the method to determine that will be the same, but that needs to be verified.  The prior offer used a 10 day volume weighted average closing price.  So I presume it will be the same.  What will affect it is what the stock price has done over those 10 days and the volume traded each day.  By the time the shares land in our accounts the XOM shares will be worth more or less than $45 per IOC share that we sold, within a few percent.  XOM stock price has been bouncing around a good bit.  But by end of January the world should have the production numbers of the NOPEC/OPECers and get an indication as to whether they are complying or cheating.  This should have the most impact before we vote by mid February.  Our best outcome will be if prices hang where they are and then oil prices begin a long steep climb right after we get our shares, which is very possible.

If there is going to be a deal, we would be better off getting it done sooner in 2017, than later.

Can you give us an outline of the legal process going forward?

Since this is a "new offer" as IOC considers it, isn't this simply like starting all over again in the legal process, especially as regards getting court approval?  Since the lower court approved the 1st deal, I would think they will also approve this one, but add in some check the box effort to appease the higher court.  Then if Phil does not challenge their decision, it is a done deal.  Correct?  It already sounds like Phil plans to challenge again.

In any case will you be voting no with dissent this time?  You said previously that the last time you simply voted "no."  I'm stronly considering dissenting this time.

Thanks

[ebster123]

I would believe many (myself included) will use the valued information from members here to vote dissent this time in the appropriate time frame. I once again publicly applaud Phil for standing strong. Thank you Phil!!

[Li'loilady]

Hear Hear !

[thg]

I thought it might be useful to look at how the new Exxon/IOC deal was put together to minimally address the concerns of the Canadian Appellate Court. I have listed what I think were the main concerns outlined in the court's decision and then added what little IOC has related to its shareholders regarding how it 'improved' the deal to comply with the court's issues.

The Appellate Court listed a number of factors which they characterized as "red flags'"

"Given the ‘red flags’ in this case –

• the absence of a fairness opinion from an independent expert,
• the failure of Morgan Stanley to assess the value of the CRP as compared with the value of the PRL prospects (again, the company’s primary asset);
• the deficiencies pointed out by Mr. Dey;
• the unchallenged report of Mr. Booth;
• the fact the CEO was in a position of conflict;
• the probability the “independent” special committee was not independent of management; and
• the lack of “necessity” for the deal."

IOC clearly has tried to address these various issues in a cursory fashion as follows:

• IOC has obtained a fairness opinion from an independent expert: BMO Nesbitt Burns Inc., dated as of December 14, 2016
• We do not know if BMO has assessed the value of the CRP as compared to the value of the PRL prospects. We may find out more relevant information in the new MIC, due mid-January. Additionally, IOC has attempted to address this issue by obtaining a new resource estimate from GLJ which reduced the P50 estimate from 10.4 Tcfe to 7.8 Tcfe. Finally, Exxon has raised the cap on the CRP to 11 Tcfe. [See below under Report of Mr. Booth.]
• The deficiencies noted by Mr. Dey [who was former chair of the Ontario Securities Commission and also former Chairman of Morgan Stanley] were that:the “process undertaken by this board in considering and recommending the Transaction … was deficient, and failed to meet current governance best practice and to ensure adequate safeguards of shareholder interests.” (At para. 27 in the lower court decision.) He [Mr. Dey} contrasted the fairness opinion of Morgan Stanley with three others with which he was familiar, each of which provided a great deal more information – and one might say, substance – than the opinion in this case."
  
  • Again we do not know if the BMO opinion will have more information and more substance than the MS opinion. All we know is that it was an "independent" report.
• The unchallenged report of Mr. Booth refers to the report by Paradigm Capital, which the Appellate Court noted stated that the deal was “inadequate, from a financial point of view, to the shareholders of InterOil.” (Appellate Court emphasis.)
  
  • In the Paradigm Capital report, which was noted in the lower court decision, it is stated that: "The appropriate estimate for the resource size, which, as per our assumptions outlined above, should be a minimum of 10 Tcfe; we note that:
    
    • i) the structure of the Transaction, specifically the cap on the CRP at 10 Tcfe, significantly constrains potential InterOil shareholder value; and
    • ii) the Consideration is below the floor implied by the lower range of the selected precedent transactions based on GLJ’s resource estimate as at December 31, 2015;
      
      • b) the completion of the Antelope 7 well, which can reasonably be expected to result in an increase to the Elk-Antelope 2C resource at the certification date;
      • we note that: i) research analysts generally postulate that the completion of the Antelope 7 well could increase the Elk-Antelope 2C resource by an incremental 1.5 Tcfe (independent of any specific evaluator), Re: Interoil Corporation, 2016 YKSC 54 Page 14 which derives a Elk-Antelope 2C certification range of 10 Tcfe to 11.5 Tcfe.
  • THE IOC respose to this report is to 1] have Exxon raise the CRP Cap to 11 Tcfe, 2] have GLJ lower its midrange estimate to 7.8 Tcfe [still unexplained how this new estimate was arrived at], and 3] obtain a new independent fairness opinion from BMO.
• The fact that the CEO was in a position of conflict has not in any public way been addressed at all.
• The probability that the "independent" special committee was not independent of management was addressed by IOC by constituting a new "fairness committee" comprised of those 4 members of the IOC BOD with the least public connections to Mr. Hession.
• The lack of 'neccessity' for the deal has not been addressed at all by the information that we have received so far.

In all, it appears that IOC has attempted to do as little as possible to enhance the deal for the benefit of the shareholders and has only done the minimal that its legal counsel must deem necessary to obtain lower court approval. Some of these questions will perhaps be better answered in the MIC, but only if the new BMO opinion provides much more detail regarding how it reached the conclusion that this new deal is now 'fair and reasonable', when most issues argue for the opposite conclusion:

• the GLJ report has lowered the resource estimate,
• the Exxon share price is now significantly higher than it would have been at the earlier closing date, thus giving IOC shareholders approximately 10% less value in the stock swap.
• the prices of both oil and natural gas have increased significantly since the initial Exxon/IOC deal was approved by the BOD, and
• the new deal is, in all relevant particulars, identical to the old "unfair and unreasonable" deal, save for the increase in the CRP cap.

Sorry, but so far, the new deal does not pass the 'smell' test. It is a patently obvious attempt to make the absolute least possible cursory adjustments to the old deal to allow it to pass muster with the Yukon courts. Since the Appellate Court decision, I have renewed faith in the Canadian court system. I hope that they can see this new deal for what it remains--not at all fair and reasonable to IOC shareholders.

  2126,  The XOM offer is a fixed price - $45 - paid in XOM shares.  So we are not getting any different value in the new offer than in the last offer.  IT's the same.  What will be different is the number of shares we get.  But we can rest assured that the method to determine that will be the same, but that needs to be verified.  The prior offer used a 10 day volume weighted average closing price.  So I presume it will be the same.  What will affect it is what the stock price has done over those 10 days and the volume traded each day.  By the time the shares land in our accounts the XOM shares will be worth more or less than $45 per IOC share that we sold, within a few percent.  XOM stock price has been bouncing around a good bit.  But by end of January the world should have the production numbers of the NOPEC/OPECers and get an indication as to whether they are complying or cheating.  This should have the most impact before we vote by mid February.  Our best outcome will be if prices hang where they are and then oil prices begin a long steep climb right after we get our shares, which is very possible.

If there is going to be a deal, we would be better off getting it done sooner in 2017, than later.

Can you give us an outline of the legal process going forward?

Since this is a "new offer" as IOC considers it, isn't this simply like starting all over again in the legal process, especially as regards getting court approval?  Since the lower court approved the 1st deal, I would think they will also approve this one, but add in some check the box effort to appease the higher court.  Then if Phil does not challenge their decision, it is a done deal.  Correct?  It already sounds like Phil plans to challenge again.

In any case will you be voting no with dissent this time?  You said previously that the last time you simply voted "no."  I'm stronly considering dissenting this time.

Thanks

Kali, The XOM share price at the moment is not reflective of what is actually going on within Exxon. I posted in another thread, an article that outlines this.

http://shareholdersunite.com/mybb/showth...?tid=11652