new SA article by Resourcearb

[freddiekingman]

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]