In light of IOC shares’ recent weakness – down 13% since the LNG project received formal
cabinet approval on November 16 (and down 40% since early August) – today we take the
opportunity to debunk one apparently widespread misconception surrounding the
company’s ongoing resource selldown discussions. We are referring to the timeframe for
concluding and announcing a partnership/selldown deal.
♦ At the stroke of midnight on December 31, U.S. income taxes could spike up, federal
spending could plummet, volcanoes could explode, the seas could rise, and the world as we
know it could come to an end. In other words, the dreaded fiscal cliff – if politicians in
Washington don’t get their act together. But for InterOil, December 31 is just another day
on the calendar. Let us reiterate that previous statement one more time – contrary to
some of the hearsay on the online message boards, December 31 is not a deadline of any
kind for the long-awaited LNG project partnership / resource selldown. Recall, the only
person who has placed any significance on that specific date was Prime Minister Peter
O’Neill, who told parliament in September that it was his intention to make sure InterOil
secures government approval by year-end. The prime minister has delivered: last month,
the cabinet gave the formal go-ahead for the project. See our brief from November 16,
“Cabinet Formalizes Project Approval, Including Partial Gas Sale to Gov’t,” for details.
♦ After getting burned several times in the past by setting (and then missing) self-imposed
deadlines for business development milestones, this time around InterOil itself is wisely
staying away from promising any specific timeframe for getting a deal done.
Management’s guidance has been limited to comments from the November 16 press
release, noting that a partnership announcement will be made “in the coming weeks” – an
intentionally vague timetable. As the company has learned, detailed partnership
negotiations are complex – a multibillion-dollar LNG project is not like buying a car – and
setting artificial timelines do nothing to help the process. Similarly, we have withheld from
attempting to pin down the precise timing of a deal announcement in the past, and we
have no intention (or ability) to do so now. While we don’t rule out an announcement
before year-end, a deal in 2013 would not change InterOil’s value proposition to
shareholders.
♦ Ahead of an announcement, there is obviously plenty of market skepticism that the
company will deliver a deal. Given this skepticism, short interest has ramped up, and we
think the stock is setting up for a short squeeze once the partnership/selldown
announcement comes out. We continue to believe that the only thing which will ultimately
quell the skepticism will be that actual announcement – i.e., updates on Antelope appraisal
and the Triceratops collaboration with Pacific Rubiales over the past week are essentially
immaterial to how the market perceives the story.