The market really has got it wrong today..

Until today, most observers thought that InterOil was looking for a big strategic partner who would largely finance the big LNG plant in Port-Morseby in exchange for guaranteed gas off-take and/or a large stake in the Elk/Antelope and LNG plant.

Although some have discussed alternatives (FLNG!) for some time, a fully fledged alternative has emerged more clearly today (here is a 45p presentation from EWC in pdf), with at least five important advantages:

• Way earlier monetization (end 2013) versus 2015-6
• Great synergies (much shorter pipeline needed, no re-injection of gas for the CSP, shared pipeline with the CSP)
• MUCH, MUCH less cash upfront needed
• As a result, IOC will be able to keep a much bigger share of their resource.
• And, as we argued previously, they will have a greatly enhanced bargaining position vis-à-vis a strategic for the big LNG plant, or they could possibly go it alone on that, or skip it and expand the much cheaper alternatives (the modular LNG plant and perhaps FLNG plant).

That doesn’t mean cash isn’t needed. For instance, EWC has committed itself to providing and financing a (much cheaper) modular LNG plant. But they already have done so for their Indonesian properties. Actually, it could even be better because a conflict with the Indonesian government seems to have stopped them from operating these, so far. Someone even suggested to ship them to PNG instead.

InterOil needs cash to build the pipeline, but they had to do that anyway for the CSP (condensate stripping plant) and the jetty. This is not the $1B or so pipeline to Port Morseby, but a much smaller one, perhaps a couple of hundred million. They also need money to operate the second rig. Where’s that money coming from?

You have to realize these financing needs are an order of a magnitude (at least) less onerous than the cash needed for the big LNG plant at Port Morseby ($7B). We don’t think it will be too hard for InterOil to get some smaller deals which will provide such cash by:

• Selling a couple of 2.5% stakes in Elk/Antelope
• Farm-out deals.

Basically, the shorts are now betting that InterOil won’t be able to do any of these much smaller, much less onerous deals. One of them will already do, as it will set the train in motion and cover a good deal of the necessary cash outlays already. Then IOC will get tens of millions from Petromin for their part of the 20.5% of the drilling cost of Elk/Antelope.

Then there are further opportunities with the floating LNG (FLNG) plans (for which the same infrastructure would also provide important synergies), and other possible off-take deals.

This seems a quintuple-win strategy to us, if there ever was one.

And we’re only up a couple of points. This won’t last too long, we don’t think so..