Investors are understandably frustrated that a deal has not yet been consummated, but there is unprecedented clarity with an SPA on the table for 4.6 tcf of gas from Elk/Antelope to Exxon. The deal is in the bag and it’s significantly more binding than previously thought. The appraisal wells for Elk/Antelope will be funded by Exxon, so there will be essentially no development costs related to PNG LNG that InterOil will have to fund, leaving significant cash for exploration, a pipeline to the Gulf coast, a gathering system and a CSP. This SPA will likely justify InterOil’s entire market valuation today, implying its remaining stake in Elk/Antelope, Triceratops, etc… are free to shareholders. The Gulf LNG option will be exercised for a second train, and a subsequent sell-down will fund InterOil’s equity investment in the plant infrastructure. I strongly believe that the NAV of the two LNG trains underpinned by Elk/Antelope will exceed $200 per share, and this will be evident with an announcement in the coming weeks.
After being briefed on today’s annual meeting by numerous attendees, it’s evident that in an otherwise very constructive meeting, investors were perturbed by the lack of specificity on timing of deal closure. It has been a month since the term sheet was agreed to by XOM and IOC, and based on the expectation the companies set forth to PM O’Neill and conversations I’ve had with attorneys who have worked on complex SPA’s and other sources, I anticipate a final deal announcement in July. Hence we’re weeks away from the event that investors have awaited for five years, the outcome is certain, and the stock is plunging on investors not getting the specificity they demand now. InterOil has been attacked by Oil Search in recent weeks, and divulging a specific timeline for closure to the public would only result in making it easier for InterOil’s enemies to intervene. The company has set the market up for a very positive surprise.
InterOil’s management team has been exercising options early as of late, the only form of insider buying that’s possible during this restricted period. They know the outcome and its degree of certainty, and they’re perplexed by the sudden impatience that’s overcome shareholders. Granted, engaging in “exclusive negotiations” was a disappointing outcome last month following almost 3 months since receipt of bids; but this prolonged period enabled InterOil to secure the best deal for shareholders. The competition for the resource was significant, as Oil Search management reportedly recently acknowledged that at least 4 bidders were in the final running for a stake PRL 15. Investors who are construing the stock’s weakness as being indicative of a bad deal are bound to be shocked.
In closing, we have a best case, non-contingent outcome that will soon revalue InterOil. I anticipate that those who are exiting and awaiting lower prices will soon be buying back their shares at a substantial premium in an effort to catch the “big move”.
