Conference Call

[jft310]

GLJ estimates do not include Ant 6 or recent testing

[jft310]

condenate stripping is being considered for Raptor . Estimate of 100 million barrels of condensate .
Ant 6 is last well JV approved
Ant 7 must add substantial volumn to be drilled decision in the second quarter must be unamious .
Confidant of 2 train . Confidence is rising .
Hession asked about his estimate of Antelope , GLJ has been more right than Interoil estimates
GLJ shows volumn to the West .
Extent of dolomite has been a game changer for Interoil .
Must get as much data as possible for appraisers .
Pavel on certification- appraisal takes 4-6 months . 5 potential appaisers . All 5 are eligible .
Oil Search appraisal might be different number they don't have recent results of testing or any possible Ant 7 numbers .

[johnwgrant]

What happened to Antelope Deep Exploratory Well ?

[Spartina]

Phil is trying to shake up the board, proposing major changes

[Getitrt2]

What happened to Antelope Deep Exploratory Well ?

I don't believe it was specifically mentioned, but I consider it deferred along with all other exploration drilling until further funding is finalized, including the E/A certification payment amount from Total and/or the anticipated credit facility expansion and extension.  Apparently Total is okay with that, and who knows what comes next or when, probably Ant Deep, which cost would be shared with the JV.  I would say Raptor outside E/A, but they may do a deal on it before proceeding with appraisal there.  They did say they are working on analysis of all the airborne and seismic data on prospects and grading them, and have identified a separate basin in the area of the southeast lease toward Port Moresby, but also stated they have met all lease obligations into 2017 in talking about the 2016 spending budget.

[Kaliboo]

My takeaways (comments from a retired oil and gas engineer):

1.  Glad to see they are reading a carefully prepared script and not deviating from it in this CC.  This is the simple way to avoid causing unintended market consequences by misspeaking.  Only wish Hession had used that practice starting on day 1.

2.  This has to be the most positive CC ever.  There is a momentum wave which the market can no longer deny or ignore and if they do, it will be at their loss.  HC Volumes are increasing.  All news is upside.  Anticipated development costs are shrinking as connectivity is great, well beyond anyones' dreams or expectations.  This is the best kind of information anyone can hope for.  I would go so far as to say that FID is a certainty, not an IF.  It's just a matter of when and how big.

3.  Western boundary is out there somewhere, but not yet seen.  Tha't the best news you can  hope for!  That means this thing is still growing.  This will likely be the primary driver for variation in the estimates of the independent certifiers without drilling A7.  Each one will use somewhat different assumptions as to where the boundary is.  That can add up to very large differences in estimates.  Another well to the west is the answer IF there is agreement to drill it to reduce that uncertainty.  IOC has placed a lot of emphasis to give the impression they will NOT support A7 unless "Shareholders get a lot of value from it" per Hession.  He also noted that "time" is a consideration in that value calculation.  Good that he's got those points loud and clear.  I'll pull a number out of the air, just in case IOC reads this stuff.  If drilling A7 has an 80% chance of adding 2+ TCFE, and a 95% chance of adding 1+ TCFE, then drill it.  Otherwise, proceed to certification.  We don't want to drill a well and get a disappointment.

4.  The discussion makes it sound as if a 2016 certification payment is still possible.  Certainly if they don't drill A7.  This CC made me think 2016 is back on the table whereas before I was writing the payment off until 2017.

5.  Sounds like monetization discussions on the other prospects are well underway.  Having first time C volume estimates is a very good thing to  help the negotiations.

6.  Missing from the discussion: No one is saying "3 trains".  They are  being extremely careful to not go there yet, however, looking at the estimates for all the updated numbers surely suggests 3 trains should be on the table, but TOT doesn't have a deal on those other prospects yet.  On liquidity there was no mention of a dilution as an option.  Glad they didn't do that.  I hope it really is not a consideration until after FID if at all.  Sounds like the loan extension is in the bag.

7.  Several new expected dates are out there to now measure Hession on delivering on his promises.  If he has learned anything by now, it's that he better deliver on all of these without exception in the time frame promised.  When you don't deliver and deliver on time, then you are guilty of "overpromising and underdelivering."  Hopefully he is breaking himself of that nasty habit.  Of course some were unavoidable.

8.  Concern - the liquidity "hour glass" is running out.  The longer we go without a large cash infusion, the more we become a distressed seller in order to raise desparately needed cash.  So all eyes will be on wrapping up the loan extenstion favorably very fast, to at least fund the company through 2017 to eliminate any concerns about running out before certification payment.

9.  Concern - They are cutting 20% more staff this year after a 60% cut is already behind them.  I thought I heard them say they went from 3000 down to 100.  That doesn't match up.  Any one get a clearer number?  In any case Phil is right, they don't need 10 directors.  With such a small group it's hard to operate anything.  They likely are down to being purely a subsurface focused group who's purpose is only to monetize.  I don't expect them to do any more drilling as an operator in the next ~2+ years.  I presume they got rid of all of those staff.  So deals on other discoveries will need to be made on existing well data and seismic.  They didn't mention any future drilling plans besides A7 which Total would drill.  They seemed to express that talks with strategic partners in these other prospects are ongoing and interest is very high.  The negative to all this is that if IOC had income and staff to further evaluate these prospects by drilling appraisal wells while advancing E/A LNG, then that would be most attractive to shareholders, if in fact one or more of these fields are another Antelope size opportunity, as they suggested.  The price anyone is willing to pay will be a good bit lower without more derisking - a loss to shareholders.  I wonder what their long term financing plan is and how they will deploy that capital to get shareholders the best possible price on remaining undrilled prospects.  You would think somewhere down the road, they will want to pick up a drill bit again.  Cutting all those people is very painful and results from bad circumstances, bad outcomes and bad management.  The future is very foggy outside of the Papua LNG project and monetizing of 3 other fields.  But if these don't go extremely well, then the rest doesn't matter.  The field data to date still support a very bright future in the remaining undrilled prospects, keeping the "string of pearls" vision alive, but the timing of delivering it is much less clear in Hession's mind than when he first arrived.

My advice to Hession.  Don't give away the farm on these other prospects.  If one of these is another Antelope, then start finding a way to raise cash and do more drilling appraisal and production testing on that one great opportunity sooner rather than later.

Why no one has already bought IOC is a mystery to me.  Can anyone explain that?  My only guess is the PNG government won't allow it.   Maybe Phil knows?  Anyone else?

Best regards,

Kaliboo

[ArtM72]

Kaliboo -

Extended discussions on A7 are likely to do nothing more than force IOC into ever degrading finance options and put off the time it's other assets can be monetized. If 2022 is the date of market supply imbalance crossover an immediate certification of E/A would get IOC the money to have those fields ready to go, p(rovided Hession hasn't fired everybody and sold everything).

[Palm]

Great info Kaliboo, thanks.

On your last point/question, trimming this far down in staff really is pretty amazing, but necessary to keep the coach bleed to a minimum. They likely have made themselves quite vulnerable as a TO candidate, but also could be positioning for a merger. Time will tell, but it will be hard to effectively suddenly try to gear back up to get active again on the exploration front.

[jft310]

The 3,000 number included rig crews , seismic crews , an expanded E and P Dept all now on Total's payroll.
Hession cut a great deal which some still can't understand . That deal allows us to get paid twice on what's actually proven to be in the ground . Hession has clearly stated all future deals will follow that model . So the starting point is not that important or the initial quantity is not relevant what matters is what's proven out measured over time with 2 payments .

[Getitrt2]

Great assessment and comments, Kaliboo!