InterOil Corp. – Outperform 2;
Companies Mentioned – IOC
IOC Settles Lawsuit for $12 Million in Shares, Lifting Legal Overhang [IOC083110b_103959]
Analyst(s): Pavel Molchanov
[Industry Classification: Energy/Exploration and Production]
InterOil has reached a settlement in a long-running civil lawsuit from a group of former investors. The lawsuit revolved around the allocation of shares when InterOil was originally being formed approximately a decade ago, alleging that there was fraud in that process. Specifically at issue was InterOil’s purchase of the refinery that was subsequently installed in PNG. Recall, the case, titled Todd Peters et al vs. Phil Mulacek et al (284th District Court of Montgomery County, Texas), has been in litigation for several years with Mr. Mulacek as the principal defendant and InterOil also named as a defendant. (For details, see our company brief from March 26, “IOC: Our Thoughts on Civil Lawsuit Being Contested by the CEO”).
As part of the settlement, the company has agreed to issue 199,667 shares, valued at ~$12 million. This represents less than 10% of the plaintiffs’ original demands for over $125 million in damages. If the settlement is approved by the court (which we view as more or less a formality), InterOil plans to issue the shares to the plaintiffs in October. However, the expense will be reflected as a charge in the 3Q10 financial results. The dilution from the new shares will be minimal – less than 0.5% of current shares outstanding.
We had already anticipated that the case would be resolved through a settlement, and today’s news finally removes an unpleasant distraction and the resulting legal overhang for IOC shares. Our Outperform rating reflects our positive stance on InterOil’s long-term cash flow potential and likelihood of near-term catalysts, including our view that one or more LNG partnerships will be announced by year-end. This is balanced by the substantial operational, cost, and timing risks as the upstream assets, condensate project, and LNG plant are developed over the next five or more years.