November 15, 2012
InterOil Corporation
Onto the Sell-down
IOC received indications of NEC approval for IOC’s
Project Agreement after over one year of political
challenge and change. The path is finally clearing
for IOC to finalize a value-clarifying sell-down.
National Executive Council (NEC) approval close at
long last. Today, the PNG Prime Minister, Peter O’Neill
affirmed that IOC would receive NEC approval for
amendments to IOC’s LNG project agreement.
Government approval will mark the end of a volatile,
14-month period extending through a Constitutional
crisis, a national election, formation of a coalition
government and direct challenges IOC’s leases and
development method. The process further extends to
early 2010, when the monetization efforts of the 9.2Tcfe
of gas/condensate began. Today’s approval allows IOC
to conclude the illusive yet value clarifying sell-down.
The next Act: shorter and shorted. Now that
government support is becoming clear, and soon to be
memorialized in the amended Project Agreement, IOC is
free to consummate a transaction in next 1-2 months.
The next Act, in our view, will be much shorter than the
enigmatic government approval process. A sell-down
will: (1) provide cash/carry for up to 32.5% Elk/Antelope
sale; (2) establish a clear value for IOC’s gas; (3) begin
the process of cash flow generation associated with a
late 2016, 3.8MTPA LNG start-up; and (4) capitalize IOC
allowing it accelerate Triceratops appraisal (PRE deal
final) and prospect exploration. IOC enters the “Next
Act” with a near record short of ~23% (float).
What changed in the Project Agreement. The
amended Project Agreement will (1) allow IOC re-locate
the LNG plant to the Gulf Provence (vs. Port Moresby);
(2) allow IOC to build a staged development, starting
with a ~3.8MTPA plant (vs. 7.6MTPA); (3) allow PNG via
the national oil company, Petromin, to take its 22.5%
interest in-kind (vs. owning 22.5% of an LNG facility);
and (4) grant PNG an option to acquire some additional
amount of Elk/Antelope at commercial terms. 3Q12
results were positive, beating Street ($0.11/sh) with
better cash position, yet less relevant to the stock.
A Win-Win Approval: Onto the Next Act, The Sell-down
National Executive Council (NEC) approval close at long
last. Today, the PNG Prime Minister, Peter O’Neill affirmed
that IOC would receive NEC approval for amendments to IOC’s
LNG project agreement. IOC is to meet with the PNG
Department of Petroleum & Energy to kick off the next stage of
the project tomorrow. Government approval and alignment will
mark the end of a volatile, 14-month period extending through
a Constitutional crisis, a national election, formation of a
coalition government and direct challenges IOC’s leases and
development method. The process further extends to early
2010, when the monetization efforts of the 9.2Tcfe of
gas/condensate began. Today’s approval allows IOC to
conclude the illusive yet value clarifying sell-down.
The next Act: shorter and shorted. Now that government
support is becoming clear and soon to be memorialized in the
amended Project Agreement, IOC is free to consummate a
transaction in next 1-2 months. The next Act, in our view, will
be much shorter than the enigmatic government approval
process. A sell-down will: (1) provide cash/carry for up to
32.5% Elk/Antelope sale; (2) establish a clear value for IOC’s
gas; (3) begin the process of cash flow generation associated
with a late 2016, 3.8MTPA LNG start-up; and (4) capitalize IOC
allowing it accelerate Triceratops appraisal (PRE deal final)
and prospect exploration. IOC enters the “Next Act” with a near
record short of ~23% (float).
What changed in the Project Agreement. The amended
Project Agreement will: (1) allow IOC re-locate the LNG plant to
the Gulf Provence (vs. Port Moresby); (2) allow IOC to build a
staged development, starting with a ~3.8MTPA plant (vs.
7.6MTPA plant); (3) allow PNG government via the national oil
company, Petromin, to take its 22.5% field interest in-kind (vs.
owning 22.5% of an LNG facility); and (4) grant PNG an option
to acquire up some additional amount of Elk/Antelope at similar
terms determined in the sell-down. These changes are within
expectations. See Progress in PNG report, Oct 14, 2012. The
complexity and broader objectives of gas use or option
expansion, likely is the reason for the 1-2 month delay in
government approval versus expectations.
Win-Win: tax revenues, electric power and industry.
Tax Revenues. Pacific LNG, IOC’s LNG project, is now
cleared to move forward. This project represents PNG’s
second LNG project and, based upon published company
estimates, tax revenue from the project represents up to 40%
increase in PNG GDP, post-phased startup (2016-2020) vs.
2011 levels. The impact of the project is of clear benefit to PNG
(revenue and collateral impact basis) and to IOC. This
compares to PNGLNG (Exxon project) that is the single largest
investment in PNG history (~$15.7Bn), is currently in peak
employment (over 15,000 workers), and is over 50% complete
with a planned start-up in late 2014. Real GDP growth is
tracking +8% in 2012, primarily due to XOM’s project.
Social objectives. PNG will also benefit by taking its 22.5%
interest in the project in-kind (natural gas) with an option for
additional gas (unclear amount today) at commercial terms.
We believe Prime Minister O’Neill is trying to advance dual
objectives of: (1) providing electricity to PNG citizens (90%
without power today) and (2) potentially grow Petromin, its
young national oil company. Petromin has a strategic venture
with Shell “to pursue upstream hydrocarbon potential in PNG.”
Minister for Petroleum and Energy William Duma stated the
alliance agreement with Shell “will provide financing for the
joint exploration and development of new oil and gas prospects
in the country.” Shell could potentially benefit via the
Government’s gas option, yet unlike fears, we believe the price
(government option gas) will be on the same level as defined in
the upcoming sell-down.
IOC benefits as well. IOC clearly benefits as its project is
finally approved, clearing the path to production, cash flow, and
reserve bookings. Having the government take gas in kind has
two benefits: (1) IOC does not having to build a facility to
handle government’s gas (22.5% less) and likely having to
carry PNG until start-up; and (2) marketing a smaller size train
(3.8MTPA vs. 7.6MTPA), which could have broader appeal to
buyers. The staged development also likely reduces the size of
the stake sold (up to 30% of 4Tcfe vs. up to 30% of 9.2Tcfe)
and the government option remain less clear (size, tenor and or
when or if it will be exercised and; hence, IOC receives
proceeds). Expect more clarity soon from DPE.
Who is the NEC? The national government is responsible for
major resource development and the NEC is the cabinet-level
body that approves development. The NEC is comprised of 33
Ministers, to whom oil & gas matters are presented by William
Duma, the Minister for Petroleum & Energy. Pre-election
statements this Spring (by Duma) that IOC was in violation of
the project agreement, which led to a government notice to
potentially terminate the project agreement, have been
rescinded. Post-election, the new coalition government, led by
Prime Minister O’Neill, stated clear support for IOC’s project
Full report attached PDF file
