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Did InterOil virtually “give away” a 2.5% stake of Elk/Antelope?

October 22nd, 2010 · 1 Comment

Someone is losing sleep over it…

The deal only turns out to be highly unfavourable only with hindsight, and this could easily change still..

The facts:

  1. In 2007, InterOil granted an option for a 2.5% stake in Elk to Clarion Finanz.
  2. In 2009,  that option had changed to an option in Elk/Antelope, for $25M a share in the exploration cost, and a 2.5% stake in the LNG plant.
  3. That 2.5% stake in the LNG plant was deemed worth just $864,377 by the parties

Now, some have argued that “giving away” 2.5% stakes for a mere $25M is rather concerning (it even loses him sleep).

Now, you may wonder, that LNG plant can’t have been worth a lot, as building it hadn’t (and hasn’t) even started yet, and the agreed price of $864K suggests they didn’t think it was worth all that much either ($35M).

However, you might be surprised to know that even at the depths of the crisis, with energy prices at their low point in December 2008, a similar stake in a similarly ‘virtual’ LNG plant on the same island was fetching nearly a cool $400M.

The deal we’re talking about is that between AGL and Nippon oil, the latter agreed to buy the former’s 3.6% stake in OilSearch gas properties plus a 3.6% stake in the yet to be build LNG plant. The division is about 46-54% for the LNG versus the gas

Back in June, Dow Jones Newswires reported that JPMorgan analysts estimated AGL’s PNG assets were worth $A975 million, with its oil and gas fields fetching $521 million and the 3.6% PNG LNG stake going for $454 million.

As the actual price was, with Aus$1.1B ($800M at the time) even higher, but the crucial part is that about 46% of that was for the LNG plant, almost $400M.

Now, there are a couple of things to consider:

  1. Clarion already had an option for a 2.5% stake in Elk (later changed to Elk/Antelope).
  2. Exxon/OilSearch was more ahead (indeed, that LNG plant is now under construction), had more gas and, crucially, had significant capital behind it already so the plant value is a good deal higher (at $15B or so, it’s budgeted over twice IOC’s proposed Napa-Napa plant as well, so it’s a lot more expensive, mainly due to locational disadvantages)
  3. So since IOC could give no iron clad guarantees that the LNG plant would be build, the ‘price’ they negotiated with Clarion Finanz should perhaps best be seen as an option value.
  4. The deal doesn’t pertain to EWC’s proposed LNG plant (that’s the property and responsibility of EWC). Perhaps this new EWC (or Floating LNG) route was already on the radar when they made this deal creating added insecurities for the big LNG plant at Napa-Napa, deflating its price.
  5. InterOil can dramatically affect the option value of that 2.5% stake in the LNG plant from Clarion if they, as we expect (albeit on a later date) still go ahead with the big LNG plant at Napa-Napa, so the last word hasn’t been said on that deal and we don’t think the price at the time (the $864K) conveys too much information, actually.

You might also like to know that using the AGL-Nippon Oil deal let Raymond James argue that InterOil could be worth up to a cool $22B. And if that’s not enough, there is always another reasonable opinion to cool the nerves.

Tags: IOC

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