The "Value in OSH Shares" Fallacy

[Movieguy]

Interoil in its PR, and a number of SHU members have touted the "value" we will receive by ownership in Oil Search.  How we will "share" in this, that or the other.  What does not seem to be understood, is that this is COMPLETELY IRRELEVANT to what we are receiving for our shares of Interoil.  This is not an emotional statement reflecting my negative feelings about the deal, nor is it some lack of faith I have in Oil Search going forward.  It is simply straightforward fact.

What we "receive" for our shares is an amount of money.  This deal says we receive 8.05 shares of OSH + the CVR.  The 8.05 shares are valued at around $40. (I realize there are nuances to this but for simplicity's sake I am just going to call it "$40" throughout the rest of this post.) One can choose to accept the shares or take the value in cash.  At that same time, ANYONE (IOC shareholders and everyone else) can buy shares in OSH at that price.  These shares at that price are not some special benefit that only IOC shareholders get.  IOC shareholders can buy shares in OSH now, or then, or 3-months later, at whatever price shares are selling for.  Buying OSH shares is an independent investment, and it may do well or do lousy, but it is INDEPENDENT  of what IOC shareholders are receiving for their IOC shares.  Again, we are receiving $40 + CVR.

If an analogy helps, say you are selling your car to Joe for $1000.  You do so, and then Joe says, "I am going to use my car as an Uber.  If you pay me $250 I will give you 25% of the profits."  You can choose to invest the $250 with Joe or not, and your investment will perform as it does.  You still received $1000 for your car.  Now if Joe had instead said, "I will pay you $1000 for your car or I will pay you $750 and give you 25% of my Uber profits," it would be the same deal.  And if you didn't do this deal but Joe was offering it to anyone else (as anyone can buy OSH shares), then again it is the same kind of situation.  You are  not getting a special deal because you are the one who sold Joe the car.

Taxwise, their may be certain benefits to certain shareholders based on their particular situations and desires, but that is not part of the "value" being paid for the shares.  We are all getting $40 + CVR.  It's that simple, and the performance of Oil Search after that is completely irrelevant.

[ArtM72]

True, except if the cash out is over subscribed.

[Movieguy]

If if it is over subscribed one can immediately sell their OSH shares and should get about the same amount of money.

[Palm]

That's kind of correct, but with your car analogy you have complete control of the selling of the car. You negotiated and you made the decision.

Here you sort of have a say in things but not a whole lot. You can decide whether to sell for cash or trade for shares, but you had no say in this propsed deal. The decision has to be (outside of fighting the proposed deal) what is the best choice for my asset? Can I do better net with OSH shares or by taking the cash and investing it elsewhere?

There really is a difference.

As far as trying to stop the deal (however it ends up) I hope people consider what may happen to IOC shares should the deal be stopped. We were 32ish before the proposed deal and today are just over $42 (which presents another controllable option; sell now). Should this deal be stopped my guess is pps plunges to where it was or quite possibly into the $20s (as whispers of deals helped pps move up a little).

Thanks to many not so brilliant moves by MH IOC was seen as a company in trouble and IMHO not desirable as a partner in any deal. MH likely would be gone along with a good bit of the BOD and there likely would be a bit of a vacuum. Then who comes in? Certainly not PM; he was the "cowboy" no one wanted to deal with. Total, OSH and the gov want IOC gone; that's pretty clear. IOC would be able to pack up their toys and go anywhere. It would likely end up as a very weak pawn. They all know that.

That's what's so hard in this for me. I don't think the liklihood of a White Knight, maybe I'll be surprised. In my mind Phil is unfortunately not the answer. MH came in likely basically uncontested. Sad situation for sure.

[Northoil]

[quote='Movieguy' pid='70815' dateline='1464361920']

Interoil in its PR, and a number of SHU members have touted the "value" we will receive by ownership in Oil Search.  How we will "share" in this, that or the other.  What does not seem to be understood, is that this is COMPLETELY IRRELEVANT to what we are receiving for our shares of Interoil.  This is not an emotional statement reflecting my negative feelings about the deal, nor is it some lack of faith I have in Oil Search going forward.  It is simply straightforward fact.

We are all getting $40 + CVR.  It's that simple, and the performance of Oil Search after that is completely irrelevant.

************************************************************************

While the math seems simple and obvious – yes, we get $40 (in value) +CVR – the outlook is not that simple.  First, you won’t get $40 in cash.  They said only about 1/3^rd can be cash; the rest will be OIS stock whether you like it or not.  Or, you can sell now or before the transaction is complete and get the $40.  That eliminates market risk, oil prices, etc., but you won’t get the CVR.

If you wait after the transaction, you have market risk between now and then (Octoberish?) It can go both ways, of course.  But then you can sell the OIS stock and get your $40(or whatever) and retain your CVR.  That has a few problems.      OIS stock can be sold on the US pink sheets (which has very thin volume and you can get killed.  I wouldn’t do it), you can convert to US ADRs at a cost I have been unable to determine, or you can sell on the Australian exchange at a cost of 0.75% brokerage commission, which isn’t the end of the world.  Right now we have no info on whether the CVR will be traded (most rights are tradeable), where and at what cost.

You say the tax effects are “not part of the value”.  If you sell at any time, you have a tax event.  If you made a profit you will lose some of it – long- or short-term.  So again, you don’t get the $40.  With the stock, I think the gain is deferred (maybe wrong)

Lastly, ignoring the wisdom/value of the deal, you have the issue of the stock itself.  OIS is a long-standing reputable active company in PNG.  They have ongoing production and income and a wealth of experience with the PNG government.  They pay a dividend!   I think the combination of Total and Oil Search will finally get our reserves monetized in my lifetime, hopefully in a cost-effective and synergistic combination with Exxon and PNG LNG.

A lot of the value of what IOC has found already and what will be found is in a future stream of income.  If you want to stay for the long haul, Oil Search stock is not a bad way to go.  They are going to make a lot of money out of this deal.  So it's not a simple decision.

[AU74]

If the deal can't be stopped despite our best efforts, I plan to take the OSH shares and hold them long term, perhaps cashing in when the Australian dollar is stronger.  If OSH in turn gets bought out, the outcome is still good.

[Spartina]

Palm, Don't you believe that after all Phil has experienced in the last 3 years that he hasn't learned something?? You don't know the guy. One of my dearest and best colleagues in the world is quite close to him. My colleague is one of the best judges of character that I know. My colleague is an extremely successful, self made multimillionaire several times over and has met many many successful and brilliant people in his long life. He says Phil is one of the most intelligent, hard working, ethical people that he has ever known. Never, ever count Phil out. Getting him back in control of IOC would be the best thing that could ever happen to this company imo. Unfortunately I am not sure that is what he wants. At this point he, like us, wants to protect what investment he still has in IOC. His interests, unlike the ass hole in charge now, actually are aligned with ours.
P.S. I want to thank you for all your posts. You have been one of the sharpest, most insightful contributors to this board. Makes me kind of sad to think that in a short time this too will change. I will miss all of you.

[Libtardius Maximus]

Palm, Don't you believe that after all Phil has experienced in the last 3 years that he hasn't learned something?? You don't know the guy. One of my dearest and best colleagues in the world is quite close to him. My colleague is one of the best judges of character that I know. My colleague is an extremely successful, self made multimillionaire several times over and has met many many successful and brilliant people in his long life. He says Phil is one of the most intelligent, hard working, ethical people that he has ever known. Never, ever count Phil out. Getting him back in control of IOC would be the best thing that could ever happen to this company imo. Unfortunately I am not sure that is what he wants. At this point he, like us, wants to protect what investment he still has in IOC. His interests, unlike the ass hole in charge now, actually are aligned with ours. P.S. I want to thank you for all your posts. You have been one of the sharpest, most insightful contributors to this board. Makes me kind of sad to think that in a short time this too will change. I will miss all of you.

Spot on Spartina. Phil wants one thing only. His money at the proper price. And like me, I doubt he wants to wait to see what happens in a year with A7 or how zebra stock performs in the next 7-8 years.

[Palm]

Palm, Don't you believe that after all Phil has experienced in the last 3 years that he hasn't learned something?? You don't know the guy. One of my dearest and best colleagues in the world is quite close to him. My colleague is one of the best judges of character that I know. My colleague is an extremely successful, self made multimillionaire several times over and has met many many successful and brilliant people in his long life. He says Phil is one of the most intelligent, hard working, ethical people that he has ever known. Never, ever count Phil out. Getting him back in control of IOC would be the best thing that could ever happen to this company imo. Unfortunately I am not sure that is what he wants. At this point he, like us, wants to protect what investment he still has in IOC. His interests, unlike the ass hole in charge now, actually are aligned with ours. P.S. I want to thank you for all your posts. You have been one of the sharpest, most insightful contributors to this board. Makes me kind of sad to think that in a short time this too will change. I will miss all of you.

Spartina,

I appreciate what you are saying and I have no doubt that Phil has learned some lessons. I know he is very intelligent and hard working. That wasn't my point. The point is that while he was CEO, even though he did what few believed he could (in finding these assets), overall he wasn't welcome/accepted, nor for the most part was IOC. IOC was and is the odd man out with OSH firmly implanted as the local and preferred company to partner with. Phil came close, we know where that counts; horseshoes and hand grenades.

If Phil could scoop up those assets and go elsewhere, he might have a chance. But should he somehow gain control, I don't think it will end up well no matter what he's learned or how smart and hard-working he is. Just don't think you get second chances in a foreign country in this business.

Appreciate all you have added over these years Spartina; hope we get to tip glasses someday while kicking up our feet.

[Spartina]

Me too Palm. Just hope that crazy buddy of yours doesn't show up…(smile)