InterOil Corp. April 5, 2013
(IOC:NYSE) Company Brief
Pavel Molchanov, (713) 278-5270, Pavel.Molchanov@RaymondJames.com
Alex Morris, Sr. Res. Assoc., (713) 278-5235, Alex.Morris@RaymondJames.com
Exploration and Production ____________________________________________
In-Flight Reading for the LNG Partnership "Holding Pattern"
♦ Over the past month, we have regularly heard the question from investors: Why hasn’t
InterOil disclosed updates on the status of its LNG partnership? Recall, final bids were
received on February 28 – from “several” prospective partners, as the company put it.
Investor questions intensified after the end of March, presumably based on the notion that
the company had one month to strike a deal. So, let’s be crystal-clear on this point:
Management did not, will not, and should not specify any precise timetable for making a
deal announcement. Neither have we. There have been instances in the past when
management attempted to give guidance on timing with regard to discussions over which
they lack unilateral control. When those timetables were not met, investors held the
company responsible for missing targets. With that in mind, it is emphatically the correct
policy for the company not to self-impose arbitrary deadlines.
♦ Here is a related question we have heard: With the bids in place, why can’t the decision be
made almost instantly? For one thing, this is the most impactful decision in InterOil’s
history, and it is far more important to get it done right than to get it done quickly. This is
also a board-level decision, which naturally entails extended deliberation and debate. But
that aside, at this point, we think the decision on the winning bid has probably been made
already. However, that does not mean that the agreement can be finalized instantly. Keep
in mind, when InterOil and the partner sign on the proverbial dotted line, they will be
making a commitment with many specific, technical provisions – it’s not just a generic
partnership. This includes things like LNG plant size, technology to be used, contractors to
be chosen, LNG pricing policy, who will handle offtake agreements, etc. As such, there are
some post-bid discussions that must be wrapped up before a comprehensive agreement
can be signed and then announced. Finally, the Papua New Guinea government is involved
in the process, and as all of us know, dealing with bureaucrats and politicians – in any
country – tends to prolong any discussion.
♦ To review: the company has previously disclosed receiving at least four preliminary bids:
two from major oil companies, one from a national oil company, and one from a utility
(known to be Kogas). What we do not know at this point is which of these four companies
have made final bids and whether any other players entered the mix late in the game.
What management has said is that all of the final bids came from companies that qualify
under the government’s criteria (i.e., “internationally recognized LNG operators&rdquo
. The
identity of the partner is much less important than the financial terms of the partnership
and associated resource selldown. For context, shares are currently trading at
approximately $0.60/Mcf on a 1P basis, which compares to a five-year South Pacific
transaction average that we estimate at around $1.20/Mcf.
♦ In the meantime, here is something that is entirely within InterOil’s control: drilling the
next well. CEO Phil Mulacek was quoted in the local media today, saying that the Elk-3
delineation well is on the cusp of spudding. Elk-3, expected to take 90-120 days, will be the
first well in the Elk/Antelope field to drill through the whole reservoir from top of gas to
the bottom reservoir at the water contact and test the lower porosity section. To be sure,
the market is far more focused (and rightly so) on the LNG partnership process than the
concurrent exploration program, but exploration catalysts should not be overlooked.
