Dust settles on IOC deal

[Tree]

Dust settles on InterOil’s PNG deal

Alison Middleton Friday, 13 December 2013 THE dust has settled on InterOil’s joint venture deal but the week has brought more questions than answers. Last Friday, after years of negotiations, InterOil confirmed it had signed a JV deal worth up to $US3.6 billion ($A4 billion) with French supermajor Total for the development of its gas reserves in Papua New Guinea. InterOil promptly lost more than a third of its market value as a result. The company’s shares tumbled 37% to $55.50 in New York and were last trading at $54.45. But as the dust settled – without a share recovery – details of the complicated deal had analysts questioning why InterOil had signed with Total rather than ExxonMobil. While a final transaction price of $1.5-3.6 billion has been agreed for between 5.4 trillion cubic feet equivalent and 9Tcfe of hydrocarbon gas, arguably the market’s reaction comes in response to Total’s insistence of payments based on appraisal drilling and certification. Fixed payments to InterOil include $613 million on transaction completion, which is expected in the first quarter of 2014, $112 million on a final investment decision for a new LNG plant and $100 million at first LNG cargo from the proposed LNG facility. InterOil said it was a “transformational transaction to monetise InterOil's Elk-Antelope fields”, while allowing the company to maintain a material 30% interest in the integrated LNG development. However, it will be years before gas is commercially sold and the deal with Total lacks the certainty an agreement with ExxonMobil would have provided, courtesy of the PNG LNG project coming online next year. Exclusivity arrangements for talks between Exxon and InterOil lapsed in August, allowing InterOil to restart talks with other candidates. PNG oil and gas company Oil Search also confirmed it was in talks to develop the Elk-Antelope discovery. “Oil Search notes the announcements made by InterOil Corporation and Total SA with respect to the acquisition by Total SA of a strategic interest in petroleum retention licence 15 in Papua New Guinea,” Oil Search managing director Peter Botten said. “As previously articulated to the market, Oil Search has been in discussions with a number of key stakeholders associated with the PRL 15 sale process. “To ensure that the market is fully informed, Oil Search confirms that these discussions are ongoing. “However, the nature of Oil Search’s potential participation in any transaction is uncertain and there is no guarantee that any agreement will be reached. “Oil Search shareholders will be kept informed of any further material developments if and when they occur.”

[Kaliboo]

[quote='Tree' pid='34262' dateline='1386930451']

Dust settles on InterOil’s PNG deal

However, it will be years before gas is commercially sold and the deal with Total lacks the certainty an agreement with ExxonMobil would have provided, courtesy of the PNG LNG project coming online next year. [quote] I can agree with the point above except for the fact that Dr MH stated more than  once in the cc that this was the deal with the "highest certainty."  I have to assume him being a good project manager is that he is considering the full TECOP of uncertainties (Technical, Economic, Commercial, Organizational, Political) as the SMs do.  That is the only correct way to evaluate an opportunity as a major flaw in any one of these can negate a good opporunity.   I would love to see his analysis.  It may be, for example, that the XOM deal would introduce too much political uncertainty for him to stomach and he may have balanced that with the negative tradeoff of the deferred LNG sales.  So in the end it is a balancing of tradeoffs that one has to accept.  It's not too often that you get the "perfect deal."  Clearly, he must have miscalculated on how the market would perceive this and the power of the shorts IMHO.  Putting my feet into his shoes and the opportunity before me, I also would want the deal with the highest certainty, if there is signficant downside to choosing the higher risk option.

[/quote]

[Tree]

[quote='Tree' pid='34262' dateline='1386930451']

Dust settles on InterOil’s PNG deal

However, it will be years before gas is commercially sold and the deal with Total lacks the certainty an agreement with ExxonMobil would have provided, courtesy of the PNG LNG project coming online next year. I can agree with the point above except for the fact that Dr MH stated more than  once in the cc that this was the deal with the "highest certainty."  I have to assume him being a good project manager is that he is considering the full TECOP of uncertainties (Technical, Economic, Commercial, Organizational, Political) as the SMs do.  That is the only correct way to evaluate an opportunity as a major flaw in any one of these can negate a good opporunity.   I would love to see his analysis.  It may be, for example, that the XOM deal would introduce too much political uncertainty for him to stomach and he may have balanced that with the negative tradeoff of the deferred LNG sales.  So in the end it is a balancing of tradeoffs that one has to accept.  It's not too often that you get the "perfect deal."  Clearly, he must have miscalculated on how the market would perceive this and the power of the shorts IMHO.  Putting my feet into his shoes and the opportunity before me, I also would want the deal with the highest certainty, if there is signficant downside to choosing the higher risk option.

1)  Do not assume major timeline difference between PNG LNG expansion and IOC/TOT plant.

2)  Both options require further drilling/certification.  No time added.

3)  Depending on how much existing IOC engineering  for Gulf development XOM and TOT/IOC will build upon,  FID for either scheme could come sooner than otherwise possible.

4)  Hession's selection of a 2nd SM for PNG has cleared all political resistance and landowner issues on island.  That will shave many months off the process.  Remember PNG LNG problems and the $1 billion cost overruns that caused?

4)  IOC nets uncapped upside and 30% 8Mtpa+ equity stake and a 2nd competing project to market future gas to, rather than only PNG LNG.

[Getitrt2]

A week after the deal the press still cannot get the facts straight. This article implies that the $1.5-3.6 billion illustrative amount is the "final transaction price" and does not cover the potentially large upside from that for either higher E/A amounts or a "bonus discovery". It also does not make it clear that is in addition to the large fixed payments, most of which will be due up front very soon.

With respect to "certainty", I think with respect to the vital need to monetize ALL of IOC's gas, even beyond E/A, this deal is much MORE certain than selling 4.6 Tcf to Exxon, even though later. With the first 4.6 Tcf going to Exxon, I think it would have created much more UNCERTAINTY about monetizing the rest of E/A, with less certainty about the amount of remaining gas at E/A and a less profitable LNG plant, making it more difficult to get a quality partner to do that and lowering the price.

[Getitrt2]

Extremely good points above, Tree!