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InterOil (NYSE:IOC)

Q4 2012 Earnings Call

February 28, 2013 8:30 am ET

Executives

Wayne W. Andrews - Vice President of Capital Markets

Phil E. Mulacek - Chief Executive Officer and Director

Collin Francis Visaggio - Chief Financial Officer

William J. Jasper - President and Chief Operating Officer

David John Holland - General Manager of Exploration and Production

Analysts

Evan Calio - Morgan Stanley, Research Division

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

William Christopher McDougall - Westlake Securities LLC, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to InterOil's Fourth Quarter Financial and Operating Results Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded.

I would now like to turn the conference over to our host, Wayne Andrews. Please go ahead.

Wayne W. Andrews

Thank you, Didi, and hello, everyone. This is Wayne Andrews, VP of Capital Markets for InterOil Corporation.

Before we start, I want to briefly remind everyone that some of the statements made during this conference call constitute forward-looking statements within the meaning of the U.S. securities law, including such statements as those regarding expectations of future results, general financial performance, future business prospects and strategies. These statements are based on management's current expectations and are subject to a number of risks and uncertainties which could cause actual results to differ materially from those described in the forward-looking statements.

Investors are cautioned not to place undue reliance on these statements. Additional information about factors that could cause our results to differ materially from those in the forward-looking statements can be found in the company's filings with the U.S. Securities and Exchange Commission and SEDAR.

The speakers from management on the call today are Phil Mulacek, our CEO; Bill Jasper, President; Collin Visaggio, CFO; and David Holland, our Upstream Manager. Also, Gaylen Byker, our Chairman, is with us today. We have a presentation to accompany our comments today. The presentation can be accessed on our website at www.interoil.com. You can find the link under the Investor Relations section on the homepage.

At this time, I'd like to turn the call over to Mr. Phil Mulacek, our CEO. Go ahead, Phil.

Phil E. Mulacek

Thank you, Wayne. We'd like to thank everyone for joining us today and participating in today's conference call, in summary of our fourth quarter 2012 and 2012 annual results.

Fourth quarter saw a stabilization of crude oil prices, resulting in improved refinery crack spreads and a solid combination of volume growth in the Downstream sector. This provided a consolidated group net profit of about $18.5 million and approximately $26 million EBITDA for the fourth quarter, with an overall year-end $1.9 million net profit, with a rough EBITDA of around $36 million for year-end 2012. Growth in the PNG economy has been a strong contributor in the earnings base for our Mid- and Downstream business. The free cash flow from these operations were targeted and spent on our upstream and LNG activities to improve the overall value of the company and our shareholders.

On the LNG front, we're very excited at these times. During the fourth quarter of 2012, we were the first LNG developer to proactively have the PNG Government secure its 25% equity in kind from the Elk and Antelope gas fields. This is dedicated for local power and natural gas-related industries. This is a key and transforming event for the country of PNG and the standard of living of those in the Gulf area. The PNG Government has reiterated its desires to control cost, accelerate our production, create jobs in underpin new revenue sources from our LNG development activities.

In support of InterOil and to demonstrate the importance of this key industry for PNG, today the prime minister of PNG, the minister of finance, minister of labor, chief secretary and the Gulf governor visited our Upstream operations, including our logistic centers, the Elk and Antelope fields' related infrastructure. The delegation was impressed with our overall upstream activity, overall operations of building the roads, bridges, camps, the systems and aid posts and the Wabo community centers for new teachers and local police.

The LNG capacity sizing, 3.8 million tonnes, supported by the PNG government, has created enhanced interest by several new parties, which engaged in the process, as we reach -- and we're now in the final stages of our partner selection. IOCs, NOCs and utilities have all moved forward, and we look forward to this partner selection for us all at Interoil and all related stakeholders. The management and board are ready to take the company into a stronger dimension through a transformation of the exploration appraisal to long-term LNG revenue.

On the Upstream side, we've just completed operations in Antelope-3. This well provided greater understanding of the central core of the Antelope structure, adding knowledge to the LNG partners for the sell-down process. Our new drilling rig, Rig 3 is now rigged up and on location at Elk-3, which is 1 of 3 commitment wells we have scheduled at Elk and Antelope over the next 12 months.

Triceratops-2 proved to be a successful discovery, just west of Elk and Antelope, with our new partner Pacific Rubiales. Similar to the process we executed in moving from Elk-1 to Antelope-1 and Antelope-4, that meant we went from drilling a flank well to targeting the top of the reef that we saw in seismic. The next well, Antelope-3, was also planned to move updip from Triceratops-2 and drill the top of the reefal location on the Triceratops structure. Overall, the 2 wells, Antelope-3 and Triceratops-2, provided solid results to increase the overall 2C gas resource reported by GLJ by about 10% or around 358 Bcf and now about 10 million -- or 10 Tcf total.

On to other business at hand, I'd like to turn the call over to our CFO, Collin Visaggio, to cover the financials in more detail.

Collin Francis Visaggio

Thanks, Phil, and welcome to everyone listening to today's presentation. You can see from our filed financials, we continue to progress and expand on the Gulf LNG Project to monetize existing, resources, and we also continue to invest in our exploration portfolio, which David Holland will cover in more detail. I know that you are all eagerly awaiting the announcements on the asset sell-down process, and I can assure you that we are all excited about our future, especially given the certified resources that we have.

As publicly disclosed and highlighted by Phil, the final bid solicitation period for the partnering process will close today, and our board intends to meet our advisors during March for the purpose of evaluating the proposals received and selecting our partner for the development of the LNG project. The asset sell-down, once completed, will fund the Gulf LNG Project and our longer-term exploration program. The timing and execution of agreements will be advised in accordance with our continuous disclosure requirements. Also, we may not extend existing agreements as we move forward towards an integrated LNG project and conclude documentation with the selected strategic partner.

Net profit for the quarter ended December 31, 2012, was $18.5 million, which has contributed to us achieving an annual net profit for the year ended December 31, 2012, of $1.6 million. The operating segments of Corporate, Midstream Refining and Downstream collectively derived a net profit for the year of $61.2 million, mainly due to an increase in gross margins attributable to the positive crude and product price movements and higher margins from export cargoes.

Our balance sheet remains robust, with our debt-to-capital ratio at 19%. As at the 31st of December 2012, our total book assets amounted to $1.3 billion and our total liabilities amounted to $524 million. Our current ratio and quick ratio were 1.3x and 0.7x, respectively. These ratios were below our internal target of above 1.5x for the current ratio and 1x for the quick ratio. The completion of the Pacific Rubiales Energy farm-in transaction in the coming days and the closing of the sell-down interest in the Elk/Antelope fields and the LNG project will bring these ratios well within our internal targets.

On the 16th of October 2012, the company entered into a 5-year amortizing $100 million secured loan facility with BNP Paribas Singapore, the Bank South Pacific Limited and the Australia and New Zealand Banking Group. Borrowings under the facility had been used to repay all outstanding amounts under the term loan granted by the Overseas Private Investment Corporation. I would like to thank the Overseas Private Investment Corporation for their long-term support, which has resulted in PNG's first secondary production facility, providing strategic fuel supply and skilled employment in the refining business to the country. It is very pleasing that we recently achieved our 100th cargo, and Bill Jasper will elaborate on this.

Firstly, summarizing our results for the group. As mentioned, our operating business segments had a combined net profit of $61.2 million, and the investments in our developing business segments resulted in a net loss of $59.6 million. Our EBITDA for the year was $35.9 million. The decrease in NPAT for the year compared to 2011 of $16.1 million was mainly due to a $25.1 million decrease in foreign exchange gain due to the kina being relatively flat through the year ended December 31, 2012, compared to the same period in 2011, when it strengthened significantly; a $9.8 million increase in interest expense resulting from the $9.7 million interest reporting tax paid in November 2012 for certain intercompany loan interest accrued from January 2007 to October 2012 and settled in that period; and a $6.3 million decrease in derivative gains primarily from the losses incurred for the commodity contracts.

These decreases were partly offset by a $10 million increase in income tax benefits, resulting mainly from the current year's results, and interest deductibility recognized subsequent to the payment of the interest withholding tax; a $4.5 million reduction in exploration costs incurred for seismic activity for PPL 236; a $4.4 million increase in gain on conveyance of oil and gas properties, which was recognized on the sale of the interest in PPL 237 to Pacific Rubiales Energy; and the waiver or forfeiture of the 1.5% IPI interest conversion rates into common shares; in addition, an improvement of $3.3 million in gross margin and increasing Downstream domestic sales volumes resulting from the supply to various development projects. The total volume of all products sold by us was 8.5 million barrels for 2012 compared to 7.4 million barrels in 2011, a significant increase. The full detailed analysis for your review is available in the press release and in the filed financials in the MD&A.

Analyzing the cash position of the group. As at 31st of December 2012, we had cash, cash equivalents and cash restricted of $99 million. Since the start of 2012, we have spent $38 million on Triceratops-2 drilling and testing works; $25 million on Antelope-3 site preparation, pre-spud and drilling works; $9 million on Elk-3 site preparation and pre-spud; $14 million on seismic activity; and $112 million on the Gulf LNG Project; and $37 million on operating business maintenance upgrades. As at the 31st of December 2012, the company has capacity to increase debt levels. Based on existing book values, a gearing of 50% allows open debt of some $600 million, more than sufficiently available cash as we continue progress towards achieving our near-term strategic objectives.

Our previous shelf expired in September 2012, and like all prudent companies, we'll be looking at replacing it, given the open debt levels, as this will add to our financial flexibility. On July 27, 2012, we executed a Farm-In Agreement with Pacific Rubiales Energy relating to the Triceratops structure and the participating interest in PPL 237 license. As at December 31, 2012, Pacific Rubiales has paid us $40 million of the staged cash payments. The first $20 million was paid on May 3, 2012, in accordance with the heads of agreement and became nonrefundable on execution of the Farm-In Agreement.

The second cash payment of $20 million was paid on September 26, 2012, in accordance with the Farm-In Agreement under the advanced payment facility. Subsequent to year-end, on January 9, 2012, Pacific Rubiales Energy paid a third cash payment of $20 million under the advanced payment facility. Closure on the next $56 million is expected in the coming days, upon completion of all conditions preset. As advised previously, Pacific LNG Operations Ltd., our partner, is participating on a 25% beneficial equity basis as a credit against joint venture cash calls and billings.

In terms of investments so far, as at December 31, 2012, $371 million has been spent on the Elk/Antelope fields, of which InterOil has contributed $255 million and upstream JV partners, $116 million. In addition, $75 million has been spent on the Triceratops-2 field, of which InterOil has contributed $61 million and upstream JV partners, $14 million. The LNG joint venture has spent approximately $50 million. $140 million has been spent on construction equipment, road constructions, logistics, site works associated with the Upstream development sites, and $53 million has been spent on the condensate stripping funding, engineering and design.

We have focused on the strategic plan to monetize the Elk and Antelope fields through an integrated development project. We are also working closely with the government of PNG to keep them updated on all key developments in relation to the project early works, strategic partnering process and the PDL application. We have successfully negotiated a transaction with Pacific Rubiales Energy, bringing a new, strong and respected play to PNG. We have delivered on a very successful well in Triceratops, which all goes well for the future exploration portfolio. We have secured new long-term debt financing arrangements, and we are very excited about the opportunities ahead of us and looking forward to maintaining momentum and selecting a strategic partner and completing the requirements with the government and stakeholders to proceed to FID on the Gulf LNG Project.

With that, I will hand back to Phil.

Phil E. Mulacek

Thank you, Collin. Moving to refinery and Downstream operations, I'd like to pass the call over to our President, Bill Jasper.

William J. Jasper

Thanks, Phil, and good morning, everyone. Pleased to report that the fourth quarter was another consecutive quarter of good gross refining margins for the refinery, and the $17.5 million gross refining margin translates to about $9 a barrel. This result is a combination of a more stable crude price environment, together with a modest improvement in IPP margins. Naphtha cracks have also shown a significant improvement in the fourth quarter, with almost a $6 a barrel increase compared to the same period in 2011, which, together with the much improved premiums associated with our current-term naphtha buyer, gives us a vastly improved position for sales. In fact, this has changed our evaluation of crudes and is partly why we are running more naphtha-rich crudes as of late, which do not carry a GRM debit versus the higher middle distillate crudes.

It is also pleasing to see that domestic sales for this quarter continued to exceed the level for the same period in 2011, being 14% higher for the quarter or 9% higher for the year. This reflects the growth in PNG mining and other construction activities. During the fourth quarter of 2012, we purchase our 100th crude cargo, which, interestingly enough, was a shipment of Kutubu, PNG's only indigenous crude. This marks a major milestone for the refinery, of more than 56 million barrels of crude with a value over $4.9 billion processed since our first cargo discharge in June of 2004. All this took place without a single lost-time injury, and I personally don't know of a single plant anywhere in the world that can make such a bold statement.

Our Downstream total sales volume for the fourth quarter of 2012 were 220 million liters, which is a 5% increase on the volumes sold in the same quarter of 2011. The volume for 12 months, at 863 million liters, is also up 16% compared with the same 12 months in 2011. Our Downstream team has done a great job managing this very diverse business, and we continue to be the PNG leader of quality product sales and service. We strive to look for opportunities to grow this business and serve the country better.

As mentioned last quarter, this growth is largely due to various oil, natural gas and mining projects that are being pursued in various parts of the country, together with a general increase in retail business activities. Our safety record at the end of 2012 as the refinery achieving a total of 5 million man-hours without a lost-time injury. This fantastic milestone was a result of a lot of dedication and focus from every one of the 126 employees at the refinery. With a total of 8.1 million man-hours for the corporation, safety remains as our top focus for all of our operations.

And with that, I'll turn it back to Phil.

Phil E. Mulacek

Thank you, Bill. I'd like to make a special mention to thank all the refinery group and everybody in Downstream as well. They've done a great job to underpin our future and really supply the cash flow for the company.

And I'd like to move on to exploration and production and hand the call over to our General Manager of Exploration, Mr. Dave Holland.

David John Holland

Thanks, Phil and good morning, everyone. As we present the financials for 2012, it is time to reflect on a busy year for the -- for InterOil's exploration group. 2012 saw the resumption of drilling, after 15 months in which we concentrated on construction and development of key infield infrastructure and the acquisition and interpretation of airborne potential field and seismic data.

In January, we spudded the Triceratops-2 well, which was declared a new discovery by the Department of Petroleum and Energy in June 2012. This was a great result. The Triceratops-2 discovery is the third successive discovery for InterOil after the discovery of Elk in -- with the Elk-1 well in 2006 and the Antelope discovery in 2008 with the Elk-4 well. As many who have followed the InterOil story will remember, the true magnitude of the Antelope resource is not fully understood until later in 2008 and early in 2009, when we drilled, logged and tested the Antelope -1 well. The appraisal and delineation operations of seismic and drilling take time, effort and resources. The results are not instantaneous nor easily won.

So as we review 2012, we are in a position where we have begun a new journey with the Triceratops-2 discovery and taken a new big step forward with Antelope-3 for Elk and Antelope. At year-end 2012, with the completion of the independent third-party resource assessment by GLJ Petroleum Consultants, the year's result -- the result of our year's work are on the table. In this assessment, we have seen an increase in the contingent sales resource on a P50 or C2 basis of 858.3 billion cubic feet of gas and 14.7 million barrels of condensate. This equates to 157.7 barrels of oil equivalent, which is an increase of 10.1% over our 2011. In anyone's language, this is a great result from only 2 wells and brings the contingent resource net to InterOil to over 1 billion barrels of oil equivalent. As shown on Slide 18, 858 million barrels of oil equivalent of this increase or approximately 54% came from the Antelope fields and 71.9 million barrels oil equivalent or 46% from the Triceratops field.

As summarized and shown on Slides 16 and 17, the Antelope-3 well came in high to the predrill prognosis made by InterOil and Knowledge Reservoir and also high to the previous mapping by GLJ in 2011. This has resulted in an increase in the gross rock volume of the reservoir within the gas pay, and this is a key factor in driving improved contingent resource assessment by GLJ Petroleum Resources. The 2012 results bring the total contingent resource for the Elk and Antelope fields on C2 basis to 1,646 million barrels of oil equivalent. Of this, 964.7 million barrels is net to InterOil. As stated above, GLJ Petroleum Consultants has, for the first time, completed the resource assessment of the Triceratops gas fields, and the aim in 2013 and 2014, with the PPL joint venture and our main partner, Pacific Rubiales Energy, will be to build on this great start. For seismic acquisition in additional wells, we hope to gradually convert prospective resource potential into contingent resources.

By way of comparison, I think it's helpful to compare Elk and Antelope at a similar stage of appraisal. In 2007, in one of the first independent resource assessment completed on the Elk and Antelope fields, the P50 or C2 contingent resource assessment was 180 -- 187 Bcf for Elk and on a prospective resource assessment, 841 Bcf recoverable from Antelope. For Triceratops, in the first resource assessment, as shown on Slide 19 of the presentation, we have a P50 or C2 contingent resource for Triceratops of 382.6 billion cubic feet and 8.2 million barrels of condensate.

This contingent resource is shown on Slide 20 and is calculated from a restricted reservoir volume in the easternmost portion of the field around the Bwata-1, Triceratops-1 and Triceratops-2 wells. Our original predrill assessment of the Triceratops resource potential of approximately 4 Tcf of gas in place has not changed. Clearly, there is a similar result at a similar stage of development for Triceratops compared to Elk and Antelope. The clear objectives of our forward appraisal program for Triceratops will be to complete additional seismic to extend seismic coverage to the west and define the western limits of the field and infield seismic within the current seismic footprint to help identify and locate the source of the reefal material identified in Triceratops-2 and also to identify further a shallow-marine facies accumulation seen to the east, north and west of Triceratops.

With a similar philosophy, our next appraisal wells will be to drill a well near Triceratops, updip of Triceratops-2 targeting more proximal reefal facies, where we have this seismic control. In addition, after we have completed the next phase of seismic, as a joint venture, we will select a location for our second and a more significant step-out well. This will target the prospective reservoir volume to confirm hydrocarbons and reservoir quality. In this stepwise fashion, we will intuitively increase -- attempt to intuitively increase our contingent resource base for Triceratops, until we meet our next commercial threshold. We are confident and believe we see the potential as we complete this appraisal to build a resource base to meet or exceed our predrill estimates.

At the end of 2012, my first year -- my first full year in my current job as General Manager of Exploration, I'd like to take this opportunity and this time to -- at this time to stop and reflect on 2012. I would like to take this opportunity to congratulate our exploration, geology and geophysics, drilling and engineering teams and the InterOil operation finance teams who support us, on a job well done. With a special mention to those who toiled away at the call face in the jungle, away from families and in often difficult conditions. Collectively, we have all worked to reach an important and psychological milestone this year. In 2012, InterOil has reached [ph] 1 billion barrels of oil equivalent on a P50 contingent basis net to the company. That said, we still have a lot to do and a busy 2013 ahead of us. I am reminded of this when I look at Slide 22 on the map.

I look forward to talking to you in a short time, when we present our first quarter results, where we'll have the opportunity to present our forward plans for new exploration appraisal seismic and further exploration and appraisal wells, and we work to unlock the prospective potential of our licenses. Thank you.

Phil E. Mulacek

Thank you, Dave. I'd like to have some closing statements. As stated earlier, everyone is excited to be at the final stage in our LNG partner selection. The components to be understood are the de-risked NPV value for the company, including clarifications and the evaluation of any conditions: price, very basic, size of participation, LNG cost approach, timing to first LNG cash flow and the risk of completion. With the prime minister's statement of support and the approval for a 3.8-million-tonne capacity project and the need to balance PNG domestic demands and gas supply, the sell-down process of Elk and Antelope is now competitive and moving ahead, and we're sticking to our timelines to go forward.

InterOil management and the board is firmly committed to our shareholders, where we transform discovered gas to a gas monetization stream. We are all focused on the commercial progress to close a sale for part of the Elk and Antelope asset and retaining the partial stake in the Elk and Antelope LNG revenues. We understand the balance expected between price of sale and forward revenue as being the helpful drivers for shareholders.

Recap in Triceratops-2 for Dave. As we enter that early stage of Triceratops, I note a comparison. When we discovered Elk in 2006, I was asked on the call, "What are the possible estimates on gas volume?" I stated Elk and Antelope could between -- could be between 1 and 4 Tcf. And the numbers, as Dave stated, were around 200 Bcf and 800 prospective by conservative third parties. Yet today, we're almost 10 Tcf 2C gas and condensate. Again, a remarkable feat for any company.

I'd like to thank our shareholders, all the staff and coworkers and the PNG government in their continued support. And we have a great year ahead of us. Before I begin the Q&A section, I'd like to state that we'll all miss Sal Ilacqua from Monness, Crespi, who had vast experience in the energy sector as an analyst, and we wish his family our deep sincere condolences.

And after that, I think we're ready for -- to open the call for questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go to the line of Evan Calio with Morgan Stanley.

Evan Calio - Morgan Stanley, Research Division

My first question relates to exploration. Maybe it's a question for Dave. I didn't know if you could give us more color on which wells will be next on the exploration front, if there had been any shifts to drilling more development appraisal wells in Elk/Antelope versus exploration balance of 2013.

David John Holland

Yes, sure. I think as Phil said, we're -- have our new Rig 3 on Elk-3, and that will obviously be the first thing that we approach. And we'll move on in 2013 to meet the well obligation that we have with the government. At this stage, the final timing of those will depend on progress at Elk-3 and -- as we decide to move forward.

Evan Calio - Morgan Stanley, Research Division

Are you moving the portable [ph] rigs from Antelope-3 to the Wahoo next? Or is that to stay in the field or yet to be determined?

David John Holland

Yes, we're currently in some discussions with the government on the balancing of our portfolio. Clearly, while we're in this process, it's a -- everybody's really keen to make some progress on the appraisal of Elk and Antelope, and currently that's in flux. But we are having ongoing conversations with the government about that.

Evan Calio - Morgan Stanley, Research Division

Great. Maybe my last question is more for Phil. Maybe it's a premature question, but my question relates to some advice of the PNG government to take incremental amount of potentially the Elk/Antelope field above the honest 6.5% [ph]? [indiscernible]. Just curious if there's any update or outlook on that potential or if that's too premature to structure [indiscernible]?

Phil E. Mulacek

It's a little premature. They're really -- I mean, they're basically more interested in making sure that they get the activity going for the economy, and we think [ph] that the project will generate it. The prime minister is supporting us, as I said. They just -- they're physically there today, and I think they're actually -- they were thinking about sleeping [ph] out into the field, and I don't know of their whole delegation, but I had a call just before this call, and that's why we added that update. I mean, they're extremely excited after they've seen the benefits of the Exxon Mobil project to the economy. So they really want to ramp this up.

Operator

We'll go to the line of Pavel Molchanov with Raymond James.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Phil, a question for you. How long do you anticipate the board's deliberations on selecting a partner?

Phil E. Mulacek

Pavel, it's a little like somebody saying, "How long is a piece of string?" We haven't got -- they're coming in today, so we'll know a lot more. And then, the advisors need time to review everything, do their analysis, qualify Q&A. I mean, I'm sure, we will have a number of meetings with them while we're in this final evaluation. I mean it's a onetime event. And we -- until we know what the -- as I stated in my clarification, any conditions that bidders have, just way too premature.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Okay. And then, assuming the process moves forward as you're anticipating, what do you think is a realistic time frame to physically begin construction of the LNG facility?

Phil E. Mulacek

I mean, that's the process, to get with them and sit down and map it out. But one of the key is what process are they going to use. Some do stick built and -- I mean we've had discussions from 36 months to 60-plus, so I mean everyone has -- had different concepts per project on how best to build it. So everybody has different concepts. Some -- I mean, it may be portfolio issues, that maybe that they are really in need of a strategic supply of near-term fuel. So as I said, I mean we -- that process is going to kick off in earnest in the next 24 hours, and we're going to know a lot more over the next 30 and 60 days. So that's what we'd like to -- that's all I could say.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Okay. Last question for me on a different topic. Did all of the increase in the resource estimate from a year ago to this latest one come from Triceratops? Or was there some change in Elk/Antelope as well?

David John Holland

Yes, the direction was -- we discussed that, is the -- that the increase -- 54% of the increase came from the Antelope field and 46% of the increase came from Triceratops.

Operator

[Operator Instructions] We'll go to the line of Chris McDougall with Westlake Securities.

William Christopher McDougall - Westlake Securities LLC, Research Division

I'm looking forward to hearing the results on the bidding process. I wanted to understand a little bit of the process with communicating with the market over the next few months, will it be kind of one update at the end when you accept the bid? Or will there be some interim updates?

Phil E. Mulacek

I mean, as we need to disclose under law, we'll complete and comply with proper disclosure. We -- it's -- I don't want to say it's too premature, but we wouldn't want to talk and be prejudicial where any comments affect the final outcome. I mean we have waited this long. We have never had better interest. LNG prices this winter have been some of the highest. We saw over $20. We saw $19 earlier this month, $19.50. And when everyone was claiming 6 months ago, we're going to see some U.S. parity and that was an absolute falsehood. So I mean we're coming together on the timing at no better -- we don't want to jeopardize that. So as we have requirements, we'll complete and we'll announce it to the market.

William Christopher McDougall - Westlake Securities LLC, Research Division

Okay, great. So then on a separate topic, the Rubiales payments are certainly welcome news. I want to understand if there'd be at cash tax burden on those payments or if you have enough kind of deferred tax losses and such to offset those.

Collin Francis Visaggio

Yes, I can answer that. There is no capital gains tax in Papua New Guinea and this is the sale of an interest in an asset.

William Christopher McDougall - Westlake Securities LLC, Research Division

Okay, great. So there'll be no tax burden. And then, on the refinery, a question there. What do you see as kind of the current market for crude? You had talked in previous quarters about as the LNG -- PNG LNG project rolls off, the construction there, then you might see a little lull in demand for some of the products. Are you seeing that in the first part of the year? Or is it kind of continuing to grow?

William J. Jasper

We've seen just kind of continuous demand. We've seen spikes -- peaks and valleys as different parts of their project has ramped up and completed, but there are still quite a bit of other projects going on in the country with the mining activity, so it's a fairly constant growth right now.

William Christopher McDougall - Westlake Securities LLC, Research Division

Okay, great. And what do you see as kind of the operating leverage in that asset, I mean typically, is there half fixed cost assets and as the volume grows, you can see some good cash gains?

William J. Jasper

Well, we're currently only operating at about 60% of capacity, and so we've got plenty of room for growth, and with that increased capacity utilization comes better economies that we see in our operations.

William Christopher McDougall - Westlake Securities LLC, Research Division

Great. And on the E&P side, with the Triceratops estimate that came in at the end of the year, could you just remind us kind of what results from well or seismic or other sources were incorporated into that resource estimate? I feel like it was very early in the kind of stage of your results for that assessment.

David John Holland

Yes, I guess, we've completed about 140 kilometers of seismic coverage, and that's really helped define kind of the eastern and southern and northern closure. And we still have to close out the western end of the structure with seismic. There was one legacy well that we had, which was Bwata-1, which was drilled in 1959, which was a gas condensate discovery. We drilled the Triceratops-1 well in 2005, in which we penetrated just into the transitional zone below the gas and then obviously, with Triceratops-2. So the results of 3 wells and 140 square kilometers of seismic is what was incorporated into the review.

Operator

And due to time constraints, I'll turn the conference back over to the speakers for any final closing remarks.

Phil E. Mulacek

We like to thank everybody. Really want to thank again the refinery at Downstream for just a phenomenal, steady pace for the company, and congratulations to that group for 100 cargoes of crude oil. That cash flow has really underpinned all of our activities and helped build the company to what it is today. And special thanks for the exploration, we're really transforming. We're all totally excited on the upcoming events. We're almost on pins and needles, like a lot of people, waiting to get our -- let's say, we're chopping at the bit to get going.

And with that thank everybody, for participating today and look forward to communicating in the near future.

Operator

And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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