Selling the refinery

[Spartina]

I would like to revisit this a little. When the price of oil started to drop, some on this board said that it was a good thing we sold the refinery when we did before the price of oil started to tank.

If Phil was at the healm he NEVER would have sold the refinery. As it turns out, the refinery would have been making a lot more money now then it had been (some of us have already pointed out that the

drop in price per barrell % wise, is more than the price % drop at the pump).

More importantly, anybody at the helm (including Pinky), would never have burned through a half a billion bucks in cash because it would not have been liquid. Spending would have been much more

prudent, and we would not find ourselves this squeeze for cash. We would have SOME cash flow.

Phil knows how precious 100 million dollars is . Just look what HE was able to accomplish with that same amount from OPIC.

[2126]

At the time of the sale of the refinery, IOC needed cash to:

• further explore its acreage,
• expand the seismic and gravity testing,
• drill Wahoo, Bobcat, Raptor, Triceratops,
• hold its leases in other areas,
• continue appraisal drilling in Elk/Antelope, and
• complete testing and evaluation of E/A.

There are some complaints now that IOC has too little cash; it would be in a far graver cash-flow situation without the refinery sale. And IOC would have not had nearly enough cash to do all of the above.

[katytrader]

I would like to revisit this a little. When the price of oil started to drop, some on this board said that it was a good thing we sold the refinery when we did before the price of oil started to tank.

If Phil was at the healm he NEVER would have sold the refinery. As it turns out, the refinery would have been making a lot more money now then it had been (some of us have already pointed out that the

drop in price per barrell % wise, is more than the price % drop at the pump).

More importantly, anybody at the helm (including Pinky), would never have burned through a half a billion bucks in cash because it would not have been liquid. Spending would have been much more

prudent, and we would not find ourselves this squeeze for cash. We would have SOME cash flow.

Phil knows how precious 100 million dollars is . Just look what HE was able to accomplish with that same amount from OPIC.

Well, one hopes that Phil's admirers did not follow him in his investing his own millions in shares of KPL.  He bought his stake at 30c/share, it's now at 6.5c, and Kina gave back its license for PPL 337.

[Getitrt2]

I agree, 2126. I think selling the refinery for what they got was a great move, and I don't even want to think about where we would be if Phil were still in charge.

[jft310]

My opinion if Phil had stayed , no Super Major deal and lost licenses ,
If Phil had a better deal with Exxon than Hession's deal then why would the BOD accept an inferior deal with Total ?? The BOD would have seen both offers .
Therefore anyone who thinks Phil had a better deal than Hession is clearly mistaken !!

[Palm]

I also agree that AT THE TIME selling the refinery was a good move. I do believe however that at that point mgmt/the Board got a bit unrealistic about the "State of the Union". There was a bit of bravado with the amount of cash on hand and available and how long it would last, etc.

However, at the time oil prices had already started to deteriorate and there were enough predictions that it would be a correction that there should have been some thought of caution. But they proceeded soon after closing the deal on the refinery to move on a stock buyback/retirement in what was announced as an up to "one year" process, to do the whole buyback over not much more than a month, stating that it would cover any shares to be issued in the warrant conversion. That was a bad sign to me and it ended up being a bad move. We know what happened with the warrants, and pps is still well below the buyback price. It seldom pays off to make such a move basically all at once. Again it was a sign.

This has played out as mgmt talked of big spending cutbacks post-operatorship transition. Either MS or RJ (I believe it was one of the two) predicted 2015 losses would be under $100 million. I had predicted $150-$180 million, and it ended up being $242 million. Have been waiting for someone to say something about this, but nada. That's staggering.

It's very hard to say which mgmt team would be "better". A bit of what Phil says has good merit with IOC's role now as a non-operator today. But he had his shot. If this BOD does not get the message, it'll be very concerning. It's a wake-up call fellas! Hope you answer and respond in the true interest of shareholders.

[Indoreservoir]

At the time of the sale of the refinery, IOC needed cash to:

• further explore its acreage,
• expand the seismic and gravity testing,
• drill Wahoo, Bobcat, Raptor, Triceratops,
• hold its leases in other areas,
• continue appraisal drilling in Elk/Antelope, and
• complete testing and evaluation of E/A.

There are some complaints now that IOC has too little cash; it would be in a far graver cash-flow situation without the refinery sale. And IOC would have not had nearly enough cash to do all of the above.

I must point out several things

1. In 2126's post, points 1-4 are the same, and 5-6 are the same - just variants on the theme.  don't be fooled by wordiness.

2. we likely could have approached the government to extend exploraton licenses,

3. did we need to drill Triceratops?

So mgmt took a punt on having no onging cash flow and forgo great profits in a falling oil price environment, and spent it on exploration - good move!  Appraisal of E/A required, but the rest was possibly poor decisionmaking.

And they could likely sell the refinery today for a fair amount more.

I did not criticize the refinery sale at the time, so much of what I say on the decion is monday morning QBing.

Maybe it was simply bad luck and mgmt made the sale decision for the right reasons, but I think not.  Is this why we pay a ridiculous $7 million/year for MH - for that kind of decision?

[jft310]

Bottom line we have the benefit of second guessing management . At the time management did what they was right . Most important is we can't change what has happened . It is what it is . Different people will slant their opinions one way or another .

So we must take a picture today and try to make some reasonable conclusions .

-In 2013 GCA did an evaluation of E/A and stated P-2 of 7 T's . Assuming no upside Interoil will receive an additional $780 million at certification and $517 million at FID. Sufficient cash to reach FID and finance 70 percent on a 2 train build like Exxon using Total's estimate  of $10 Billion .

-But everyone knows we have drilled 3 wells since the last GCA estimate and done extensive connectivity and flow testing . Those numbers are not reflected in the 2013 report . What will they add???How much was anticipated in the 2013 report ?? What assumptions were wrong and need update . ??The answer is wait till June and see what the 2 new appraisals average ???They should be higher than 7 T.

-Most investors understand this is 5 percent of our lease area this PRL-15 . With 95 percent of our land area left to play in over time . We appear to be in negotiations to sign another deal on TBR . Cash upfront and more drilling . -Cash burn is projected to be under $200 million per year after the scale back of the company .

-At $36 Brent and $16 Billion dollar build cost the ROI on the project is 16 percent .Robust numbers . All that info on the Interoil slides . Reality Brent is $44 today and build costs are $10 billion projected . Or an even higher ROI . There should not be 1 person anywhere that does not think this plant gets built !!

This remains a very cheap asset . Per the CEO of Total appraisal in 2016, FID in 2017 and construction in 2018.

With an FID we can anticipate future cash flows and discount then back to present time .

[Tree]

This is not really debatable.
Sure, talk of great refinery margins in general today make one long for net profits today, but the reality is IOC could not have survived as a refiner as oil prices crashed.
Those cargoes of crude domestic and imported to PNG for refining are contracted in advance. 'In advance' means at prices higher (much higher) than real time oil price, in a crashing oil market. IOC would have been contractually been overpaying for crude to refine and THEN selling into a shrinking PNG domestic market at halved wholesale/retail prices.
IOC would not have survived that adjustment period.
On top of that, consider the import tariff's on the imported crude. Puma had an import tax liability of $1.4 BILLION they could not pay as of September 2015.
That's only 14? months or so after IOC was able to unload the 'hot potato' aka refinery to Puma.
Puma's balance sheet allowed them to fund cargos and refine/sell at a loss only so long, but it wasn't strong enough to pay the tariff's as well. There were public negotiations with PNG Customs Commissioner on reducing that tax liability.
Making matters worse for Puma domestic market shrank with falling forestry, mining demand and the wind up of PNG LNG construction phase. Crude cargoes are purchased with US dollars. Ever tried to convert a cargo's value of friggin Kina to US dollars? Good luck here. Take another haircut as Puma did.
Puma country manager summed this up in 2015:

"JIM COLLINGS: Due to the lack of liquidity in the forex markets, Puma Energy has only been able to convert very limited amounts of local currency into US dollars to pay for its supplies. Puma has kept the government informed on this matter and has been trying to work with them on a solution. For the past year, Puma Energy has used its own resources in order to avoid fuel product shortages for Papua New Guinea, in the hope that a liquidity resolution is achieved. This has not been forthcoming in any meaningful way and we have now reached a stage that is unsustainable."

Thank God Hession took IOC out of the refinery biz. There was no option in context of the market realities of 2014.

[Spartina]

Points taken gentlemen, good discussion - love this board.