Hemi's Interoil Research Note - Winner Announced When??!!!

[efi426hemi]

One of the key questions for those invested in options is when will IOC announce the winning bidder?  Outside of the executive, I don't think anyone can give an exact answer, but I believe I can provide a very close guesstimate.  Before we get into dates, lets understand what is involved with the bidding process.  Fortunately, I have been involved with numerous bids with the Alberta government, albeit from an IT perspective.  At its fundamentals though, the bidding process between IT and E&P is the same.  So lets look at the basics of a bid from an IT perspective.

1. Phase 1: The procuring entity (IOC) issues a RFP (Request for Proposals) document
   
   1. This RFP contains the requirements around the bid.  These requirements may include:
      
      1. Is it for a Service/Asset/Both?
      2. What are the details of the service requirements, how does the bidder meet the requirements?
      3. What are the specifics about the asset, what access to data room is allowed, etc?
      4. Format for bid proposals/Confidentiality agreements/blocking of share acquisition/etc
   2. The RFP is then made public
      
      1. In IOC's situation the Investment Banks likely distributed the RFP to potential vendors.
2. Phase 2: The bidders then have an opportunity to review the contracts and ask questions/clarification or negotiate with the procuring entity (IOC).
   
   1. I would expect that this would include intense back and forth with the end result being:
      
      1. the lawyers from the bidders side documenting the details
      2. the lawyers from the procuring entity reviewing/approving the documentation
   2. With multibillion dollar sales, this would obviously take many months.
   3. This would be done for every bidder.
   4. Government input would obviously be necessary in this phase
3. Phase 3: At this point it is the responsibility of bidder to submit their final bid (most likely 1000's of pages) to the procuring entity (IOC).
   
   1. Obviously this would be impossible to review in a weekend so the bid documentation would be organized in a main section (majority of documentation) with Schedule addendums
      
      1. The schedule addendums (A,B,C, etc) would be very short and would contain things like bid price, how much payment upfront, start dates, etc.
      2. Important: Using this format, one could finalize the massive details prior to final bids being due and then just review the Schedule documents to pick the winner.
   2. A key point to this submitted bid, is that it would be signed by bidding party to make it legal.

So, lets apply this to the IOC selldown:

• Bidders would have worked out and documented the massive legal details regarding their bids and these documents would contain 98% of the final bid.
  
  • These bid documents would have been reviewed and approved by IOC legal, executive, and BoD prior to end of January.
  • They haven't been twiddling their thumbs for the past 16 months
• The bidders would then have the opportunity to issue their final/best bid probably through the use of Schedule addendums.

Come, get to the point Hemi.....now why is all of the above important?  It is because that IOC is NOT legally obligated to announce a winning bidder until pen is put to paper.  So all the legal documentation must be completed and signed before we hear an announcement.  Assuming all of the above I have said is accurate it means 2 important things:

• IOC will not have to spend long identifying the best bidder
• IOC will be able to put pen to paper very quickly

So combine the above point with bids being due by Thursday Feb 28th and the IOC BoD meeting over the March 2/3 weekend to review, I believe this means that we will have an announcement by March 10th.  This of course is all my best guess, so use or flush.  Looking forward to others thoughts regarding my above hypothesis.

H&H,

Hemi

[Tree]

March 3rd, Exxon/JKM. Use or flush.
However I recommend others defer to hefi.

[CAC]

One of the key questions for those invested in options is when will IOC announce the winning bidder?  Outside of the executive, I don't think anyone can give an exact answer, but I believe I can provide a very close guesstimate.  Before we get into dates, lets understand what is involved with the bidding process.  Fortunately, I have been involved with numerous bids with the Alberta government, albeit from an IT perspective.  At its fundamentals though, the bidding process between IT and E&P is the same.  So lets look at the basics of a bid from an IT perspective.

1. Phase 1: The procuring entity (IOC) issues a RFP (Request for Proposals) document
   
   1. This RFP contains the requirements around the bid.  These requirements may include:
      
      1. Is it for a Service/Asset/Both?
      2. What are the details of the service requirements, how does the bidder meet the requirements?
      3. What are the specifics about the asset, what access to data room is allowed, etc?
      4. Format for bid proposals/Confidentiality agreements/blocking of share acquisition/etc
   2. The RFP is then made public
      
      1. In IOC's situation the Investment Banks likely distributed the RFP to potential vendors.
2. Phase 2: The bidders then have an opportunity to review the contracts and ask questions/clarification or negotiate with the procuring entity (IOC).
   
   1. I would expect that this would include intense back and forth with the end result being:
      
      1. the lawyers from the bidders side documenting the details
      2. the lawyers from the procuring entity reviewing/approving the documentation
   2. With multibillion dollar sales, this would obviously take many months.
   3. This would be done for every bidder.
   4. Government input would obviously be necessary in this phase
3. Phase 3: At this point it is the responsibility of bidder to submit their final bid (most likely 1000's of pages) to the procuring entity (IOC).
   
   1. Obviously this would be impossible to review in a weekend so the bid documentation would be organized in a main section (majority of documentation) with Schedule addendums
      
      1. The schedule addendums (A,B,C, etc) would be very short and would contain things like bid price, how much payment upfront, start dates, etc.
      2. Important: Using this format, one could finalize the massive details prior to final bids being due and then just review the Schedule documents to pick the winner.
   2. A key point to this submitted bid, is that it would be signed by bidding party to make it legal.

So, lets apply this to the IOC selldown:

• Bidders would have worked out and documented the massive legal details regarding their bids and these documents would contain 98% of the final bid.
  
  • These bid documents would have been reviewed and approved by IOC legal, executive, and BoD prior to end of January.
  • They haven't been twiddling their thumbs for the past 16 months
• The bidders would then have the opportunity to issue their final/best bid probably through the use of Schedule addendums.

Come, get to the point Hemi.....now why is all of the above important?  It is because that IOC is NOT legally obligated to announce a winning bidder until pen is put to paper.  So all the legal documentation must be completed and signed before we hear an announcement.  Assuming all of the above I have said is accurate it means 2 important things:

• IOC will not have to spend long identifying the best bidder
• IOC will be able to put pen to paper very quickly

So combine the above point with bids being due by Thursday Feb 28th and the IOC BoD meeting over the March 2/3 weekend to review, I believe this means that we will have an announcement by March 10th.  This of course is all my best guess, so use or flush.  Looking forward to others thoughts regarding my above hypothesis.

H&H,

Hemi

++++++++++++++++++++++++++++

Hemi, that is very informative.  Thank you.

What is your experience wth the typical structure of the binding bid process?   Specifically, I am wondering whether receipt of 4 "binding bids" by 2/28 is only binding on the bidders...or whether the rules of the process potentially tie IOC's hands as well.  I guess my question, as it relates to timing, would be whether IOC can identify the bid that is best...but rather than just accepting it...first take that bid back to the others and show them exactly what they have to beat.  That would seem to be an advantageous option to have (to potentially maximize the terms) but it may not be permissible and it would obviously delay things to some degree as well.  Is that likely to be allowed under a typical structure for this type of bid process?

[TxPm]

Cac,

From my experience working with IB's (for what it's worth being from Texas my experience has been primarily with privately owned E&P companies being sold to private equity or larger industry players) final bids are final bids. There is very little negotiations after that or trying to get counter offers. This is when bidders put their best foot forward. With that being said I fully agree with Hemi that March is our month. Since he references trading options though I think the March options aren't leaving a lot of room for error and would instead recommend the June contracts. The Junes would also allow time for a hostile takeover by one of the losing bidders. If you look at some of my previous posts you can get an idea of which specific contracts I'm in.

[efi426hemi]

Hi CAC,

I can give a broad generalization of how I think IOC is bound by this bidding process.  To make it short and sweet, I believe that IOC can do whatever the hell they want.  Meaning they could extend the process another month, cancel the bidding process entirely, change the specifications of the selldown (only selling 15% now), etc

HOWEVER, this is extremely unorthodox and is only done in exceptional circumstances.  My personal opinion is that your scenario WILL NOT happen.  I also believe there have been multiple rounds of internal bidding with the results being communicated to all bidding parties.  I believe that has produced an acceptable bid for IOC.   With an acceptable bid, we finally see that final (take it or leave it) deadline.

It would be extremely bad karma with the bidders, shareholders and government to change the process now and I would be extremely disappointed if that happened.

FWIW, please do your own research, and most importantly Health and Happiness,

Hemi

[CAC]

Thanks, boys. This site is outstanding!

[Palm]

Cac, From my experience working with IB's (for what it's worth being from Texas my experience has been primarily with privately owned E&P companies being sold to private equity or larger industry players) final bids are final bids. There is very little negotiations after that or trying to get counter offers. This is when bidders put their best foot forward. With that being said I fully agree with Hemi that March is our month. Since he references trading options though I think the March options aren't leaving a lot of room for error and would instead recommend the June contracts. The Junes would also allow time for a hostile takeover by one of the losing bidders. If you look at some of my previous posts you can get an idea of which specific contracts I'm in.

Tx, I agree with your comments on the bid process. All of the back and forth has taken place to the point that bids are pretty "tight". All of the material information has been given and questions answered. Ant3 was the last piece and answered any doubters; IOC eluded to that in the presentation. The government wants this process done, the IBs have helped run the bidding to its conclusion and bidders have had ample time to go to their BODs to get commitment and permissions. If its extended at this point, integrity of the process is broken.

I believe IOC has their pick. Only a leap-frog bid might change things, but that decision would happen very quickly. I would also bet that the photo op with the government is pretty well set up.

[efi426hemi]

Hi Everyone,

After reading Doublebagger's post from today, I contacted a member of the executive and confirmed the role of the IB's and the bidders during the end game.  Combining that with my initial post above, I can add more clarity to timing.  As a reminder we have 3 investment bankers representing the different world demographics.  

• Morgan Stanley - representing North America - presumably an Exxon and/or Chevron
• Macquarie - representing South East Asia - presumably a JKM and/or Sinopec
• UBS - representing Europe - presumably a Total and/or Shell

Final bids are submitted to these investment banks and as Doublebagger points out, they will prepare a final recommendation that ranks the bidders based upon the scenarios, models, prices etc.  Clearly this will take some time, but as I previously stated, the main guts of the bid packages should have already been prepared and reviewed by IOC and the IBs.  Also given that the bid packages should be fairly evenly split between IB's, no bottlenecks should overly delay the process.

With that all being said, I previously asserted that we would have an announcement by March 10th, but now I believe it is more probable that we hear of something by March 18th.

Use or flush and in place of my customary closing, for the next few weeks, I am going to use Keep it on Ice!

Hemi

p.s.  I guess my bids with the government aren't big enough to require investment bankers 

[ArtM72]

Some problem with that model it would seem with a JKM/Exxon JV, which to me sounds like the winner, especially with the new loan guarantees announced by Japan. That would make a cross region bid evaluation necessary, although it already may have been done.

Another thing. If the IBs were to take 2 weeks to evaluate proposals I wonder why the board meeting was scheduled for the first week in March.

I guess the important take home is that a substantial selldown with the announcement of an operating partner will happen anytime shortly after March 1st. There doesn't seem to be anything that can stop that train.

[Stavros]

I agree with you Art.
The passengers will alight from the train sometime between March 4 and March 13.

The question is whether the train pulls into the station on the Moon (Sell Down) or all the way to the Stars (Buy Out).

If it's only a Sell Down in March it'll morph into a Buy Out by the end of 2013.