Newest Pavel comments

[ltinvest]

In our company comment from Friday, we laid out our thoughts on the resource selldown

agreement with Total. To recap, we see Friday's 37% shellacking in the stock as an entirely

excessive knee-jerk reaction (of a kind that InterOil investors are surely familiar with). We take

this opportunity to address some of the common questions we heard from investors on Friday.

Why did InterOil and Total have separate press releases?

When it comes to asset transactions, E&P investors are familiar with the fact that the buyer and

seller routinely issue separate press releases, with each highlighting the elements that are more

favorable to their side. This is common PR practice - nothing unusual about it. That said, a joint

press release would have been a better approach. InterOil rectified this around noon on Friday,

when it filed the full purchase and sale agreement - the official document binding InterOil and

Total - but the initial period of ambiguity when investors saw two separate press releases was

still unhelpful. Since the stock resumed trading only after the agreement was filed, we doubt

that this issue played a major role in the selloff, but it's still a teachable moment.

Why do the $/Mcfe multiples increase with the amount of gas?

The answer is intuitive. Because the economics of any LNG project inherently get better the more

underlying resource there is, Total is willing to pay a higher unit price for the gas as the quantity

rises. The lowest "bracket" ($0.77/Mcfe) starts at 3.5 Tcfe, the minimum critical mass for this

specific LNG project. The next one ($1.03/Mcfe) starts at 5.4 Tcfe, and the top one ($1.29/Mcfe)

starts at 6.5 Tcfe. Keep in mind, the independent third-party's (GLJ Petroleum Consultants) 2P

(Proved Plus Probable) resource estimate for the Elk/Antelope field is 10 Tcfe, so it would take a

resource shortfall of more than 30% for the top bracket not to be reached. Reserve engineering

firms, as a matter of principle, err on the side of conservatism, so if anything, the actual resource

base is likely to be bigger - not smaller - than what GLJ has estimated.

How do the deal's $/Mcfe multiples compare to expectations?

It's obviously difficult to know what "whisper number" the market was expecting. What we

know is that the stock was trading at multiples near $0.80/Mcfe in the weeks leading up to the

announcement. Relative to this, the brackets described above should not have been a source of

disappointment - certainly not warranting a 37% selloff. It is fair to note that the brackets

compare less favorably to the five-year South Pacific transaction average (~$1.20/Mcfe), but

neither the company nor we ever suggested that there is anything magic or deterministic about

the $1.20/Mcfe number - there is tremendous variability both above and below.

Why does Total want resource certification?

Before you buy a car, you take it for a test drive. Before companies agree to a merger, they do

their due diligence. This is no different. It is natural for the buyer in a multi-billion-dollar

upstream transaction to participate in an analysis of the resource base. After all, at stake here is

more than just the resource payments that Total will make to InterOil - there is also the actual

LNG facility, which is likely to carry an even higher price tag. Given the scale of the

proposed investment, it would be truly strange if Total did not insist on resource certification.

What will InterOil do will all the money?

InterOil stands to receive $613 million in 1Q14 - tax-free. The company has stated that the

proceeds will be allocated to debt reduction (total debt was $290 million as of 3Q13) and capital

investment, i.e., resuming the exploration program - with multiple high-impact prospects on deck

for 2014-15. However, given the size of the cash injection, we think management ought to

consider some return of capital to shareholders. For example, if one-third of the $613 million were

allocated to share buyback, that would equate to 8% of shares outstanding.

[Tree]

There are 3 valueless Elephants in this deal :
1) Certification
2) Discovery Bonus
3) 30% stake in, presumably, a multi-train LNG project

[ArtM72]

Pavel's analysis is fine with the exception that they should stash all the cash, planning to use it to fund their share of the LNG plant. A dividend would be more appropriate on certification when we hopefully see some big money.

[ltinvest]

Once the resource payment is made and FID is reached, Interoil will all kinds of financing options for the LNG plant. It's time to return some capital to shareholders through a dvidend or buy back....and its time now.

[kerekesc]

In our company comment from Friday, we laid out our thoughts on the resource selldown

agreement with Total. To recap, we see Friday's 37% shellacking in the stock as an entirely

excessive knee-jerk reaction (of a kind that InterOil investors are surely familiar with). We take

this opportunity to address some of the common questions we heard from investors on Friday.

Why did InterOil and Total have separate press releases?

When it comes to asset transactions, E&P investors are familiar with the fact that the buyer and

seller routinely issue separate press releases, with each highlighting the elements that are more

favorable to their side. This is common PR practice - nothing unusual about it. That said, a joint

press release would have been a better approach. InterOil rectified this around noon on Friday,

when it filed the full purchase and sale agreement - the official document binding InterOil and

Total - but the initial period of ambiguity when investors saw two separate press releases was

still unhelpful. Since the stock resumed trading only after the agreement was filed, we doubt

that this issue played a major role in the selloff, but it's still a teachable moment.

Why do the $/Mcfe multiples increase with the amount of gas?

The answer is intuitive. Because the economics of any LNG project inherently get better the more

underlying resource there is, Total is willing to pay a higher unit price for the gas as the quantity

rises. The lowest "bracket" ($0.77/Mcfe) starts at 3.5 Tcfe, the minimum critical mass for this

specific LNG project. The next one ($1.03/Mcfe) starts at 5.4 Tcfe, and the top one ($1.29/Mcfe)

starts at 6.5 Tcfe. Keep in mind, the independent third-party's (GLJ Petroleum Consultants) 2P

(Proved Plus Probable) resource estimate for the Elk/Antelope field is 10 Tcfe, so it would take a

resource shortfall of more than 30% for the top bracket not to be reached. Reserve engineering

firms, as a matter of principle, err on the side of conservatism, so if anything, the actual resource

base is likely to be bigger - not smaller - than what GLJ has estimated.

How do the deal's $/Mcfe multiples compare to expectations?

It's obviously difficult to know what "whisper number" the market was expecting. What we

know is that the stock was trading at multiples near $0.80/Mcfe in the weeks leading up to the

announcement. Relative to this, the brackets described above should not have been a source of

disappointment - certainly not warranting a 37% selloff. It is fair to note that the brackets

compare less favorably to the five-year South Pacific transaction average (~$1.20/Mcfe), but

neither the company nor we ever suggested that there is anything magic or deterministic about

the $1.20/Mcfe number - there is tremendous variability both above and below.

Why does Total want resource certification?

Before you buy a car, you take it for a test drive. Before companies agree to a merger, they do

their due diligence. This is no different. It is natural for the buyer in a multi-billion-dollar

upstream transaction to participate in an analysis of the resource base. After all, at stake here is

more than just the resource payments that Total will make to InterOil - there is also the actual

LNG facility, which is likely to carry an even higher price tag. Given the scale of the

proposed investment, it would be truly strange if Total did not insist on resource certification.

What will InterOil do will all the money?

InterOil stands to receive $613 million in 1Q14 - tax-free. The company has stated that the

proceeds will be allocated to debt reduction (total debt was $290 million as of 3Q13) and capital

investment, i.e., resuming the exploration program - with multiple high-impact prospects on deck

for 2014-15. However, given the size of the cash injection, we think management ought to

consider some return of capital to shareholders. For example, if one-third of the $613 million were

allocated to share buyback, that would equate to 8% of shares outstanding.

"..one-third of the $613 million were allocated to share buyback....."  Where has Pavel been for the past years?  The manipulation of IOC's stock price, to a great degree, is due to its relatively small share capitalization.  If management were to decide to return capital to shareholders, it should do so with a special dividend....about $4 per share ($200 million).  And, it should consider a significant stock split as well.  These actions would be beneficial to shareholders.....not a stock buy-back!

[jft310]

In our company comment from Friday, we laid out our thoughts on the resource selldown

agreement with Total. To recap, we see Friday's 37% shellacking in the stock as an entirely

excessive knee-jerk reaction (of a kind that InterOil investors are surely familiar with). We take

this opportunity to address some of the common questions we heard from investors on Friday.

Why did InterOil and Total have separate press releases?

When it comes to asset transactions, E&P investors are familiar with the fact that the buyer and

seller routinely issue separate press releases, with each highlighting the elements that are more

favorable to their side. This is common PR practice - nothing unusual about it. That said, a joint

press release would have been a better approach. InterOil rectified this around noon on Friday,

when it filed the full purchase and sale agreement - the official document binding InterOil and

Total - but the initial period of ambiguity when investors saw two separate press releases was

still unhelpful. Since the stock resumed trading only after the agreement was filed, we doubt

that this issue played a major role in the selloff, but it's still a teachable moment.

Why do the $/Mcfe multiples increase with the amount of gas?

The answer is intuitive. Because the economics of any LNG project inherently get better the more

underlying resource there is, Total is willing to pay a higher unit price for the gas as the quantity

rises. The lowest "bracket" ($0.77/Mcfe) starts at 3.5 Tcfe, the minimum critical mass for this

specific LNG project. The next one ($1.03/Mcfe) starts at 5.4 Tcfe, and the top one ($1.29/Mcfe)

starts at 6.5 Tcfe. Keep in mind, the independent third-party's (GLJ Petroleum Consultants) 2P

(Proved Plus Probable) resource estimate for the Elk/Antelope field is 10 Tcfe, so it would take a

resource shortfall of more than 30% for the top bracket not to be reached. Reserve engineering

firms, as a matter of principle, err on the side of conservatism, so if anything, the actual resource

base is likely to be bigger - not smaller - than what GLJ has estimated.

How do the deal's $/Mcfe multiples compare to expectations?

It's obviously difficult to know what "whisper number" the market was expecting. What we

know is that the stock was trading at multiples near $0.80/Mcfe in the weeks leading up to the

announcement. Relative to this, the brackets described above should not have been a source of

disappointment - certainly not warranting a 37% selloff. It is fair to note that the brackets

compare less favorably to the five-year South Pacific transaction average (~$1.20/Mcfe), but

neither the company nor we ever suggested that there is anything magic or deterministic about

the $1.20/Mcfe number - there is tremendous variability both above and below.

Why does Total want resource certification?

Before you buy a car, you take it for a test drive. Before companies agree to a merger, they do

their due diligence. This is no different. It is natural for the buyer in a multi-billion-dollar

upstream transaction to participate in an analysis of the resource base. After all, at stake here is

more than just the resource payments that Total will make to InterOil - there is also the actual

LNG facility, which is likely to carry an even higher price tag. Given the scale of the

proposed investment, it would be truly strange if Total did not insist on resource certification.

What will InterOil do will all the money?

InterOil stands to receive $613 million in 1Q14 - tax-free. The company has stated that the

proceeds will be allocated to debt reduction (total debt was $290 million as of 3Q13) and capital

investment, i.e., resuming the exploration program - with multiple high-impact prospects on deck

for 2014-15. However, given the size of the cash injection, we think management ought to

consider some return of capital to shareholders. For example, if one-third of the $613 million were

allocated to share buyback, that would equate to 8% of shares outstanding.

"..one-third of the $613 million were allocated to share buyback....."  Where has Pavel been for the past years?  The manipulation of IOC's stock price, to a great degree, is due to its relatively small share capitalization.  If management were to decide to return capital to shareholders, it should do so with a special dividend....about $4 per share ($200 million).  And, it should consider a significant stock split as well.  These actions would be beneficial to shareholders.....not a stock buy-back!

Sam Tibbs CFA has modeled a dividend vs share buy back for Corp IOC

The share buy back is more accretive to longs

[kerekesc]

A buy-back may be more accretive to longs, but it also is "more accretive" to stock price manipulation.

[efi426hemi]

Kerekesc, a share buyback has nothing to do with a low float.  IOC buys back 10% which leaves us with 40 million shares increasing value in the company.  Then the company can issue a 10-1 split to give a 400 million float.  Two mutually independant events.

Art, assuming 18 billion to build the lng plant and IOC owning 30% this means we need to fund 4.8 billion for the plant.  Banks will finance 80% on a lng plant build, so IOC will need approx 1 billion to meet their commitment to build the plant.  So assuming another 1 billion for exploration and a 11 tcf certification, what are we doing with the other 3 billion in cash?  Food for thought.

In terms of Pavel's question: How do the deal's $/Mcfe multiples compare to expectations?     Why the hell isn't anyone pointing out the price was low because we get 30% interest in a money fahking making machine called a lng plant.  RJ and Morgan Stanley need to point this out for crying out loud!!!!!

H&H,

Hemi

[kerekesc]

Kerekesc, a share buyback has nothing to do with a low float.  IOC buys back 10% which leaves us with 40 million shares increasing value in the company.  Then the company can issue a 10-1 split to give a 400 million float.  Two mutually independant events.

Art, assuming 18 billion to build the lng plant and IOC owning 30% this means we need to fund 4.8 billion for the plant.  Banks will finance 80% on a lng plant build, so IOC will need approx 1 billion to meet their commitment to build the plant.  So assuming another 1 billion for exploration and a 11 tcf certification, what are we doing with the other 3 billion in cash?  Food for thought.

In terms of Pavel's question: How do the deal's $/Mcfe multiples compare to expectations?     Why the hell isn't anyone pointing out the price was low because we get 30% interest in a money fahking making machine called a lng plant.  RJ and Morgan Stanley need to point this out for crying out loud!!!!!

H&H,

Hemi

I am sorry, Hemi, I am getting old and senile.  I was attempting to articulate that in a share buy-back decreases the number of shares outstanding (as per your example) thereby increasing the possibility of stock price manipulation.  And, in addition, significant stock split would increase the number of shares outstanding, thereby decreasing the possibility of stock price manipulation.  I admit that this is not a new and original thought.  This was discussed on this board in the past.

[ArtM72]

Art, assuming 18 billion to build the lng plant and IOC owning 30% this means we need to fund 4.8 billion for the plant.  Banks will finance 80% on a lng plant build, so IOC will need approx 1 billion to meet their commitment to build the plant.  So assuming another 1 billion for exploration and a 11 tcf certification, what are we doing with the other 3 billion in cash?  Food for thought.

In terms of Pavel's question: How do the deal's $/Mcfe multiples compare to expectations?     Why the hell isn't anyone pointing out the price was low because we get 30% interest in a money fahking making machine called a lng plant.  RJ and Morgan Stanley need to point this out for crying out loud!!!!!

H&H,

Hemi

I'm wondering if the price is low because:

1.  We have yet to see the JVOA

2.  IPI shares have yet to be acquired

3.  No terms for the reported major farm-in have been released publicly

4.  Reporting on the parts of this deal we know have been uniformly bad...like "Bear Stearns is not in trouble" bad.

5.  There are people here and elswhere that believe all they need to find another 10+ bagger elsewhere is to quickly get their money out of IOC and, my favorite,

6.  IOC has so damn much gas and condensate in their license area it has drawn the attention of all sorts of manipulative gamesmanship and all of the approach avoidance by players that I would be experiencing on a blind date with Anastasia Volochkova.

Champaign is back in the cellar.  A very good vintage.  It cellars well.