I am bearish on InterOil (NYSE:IOC) because I know its history and I know what the company and management have done. I have been following the company for a long time, and have written many articles on it, you can read them on my profile page. As shown, I've researched and written about InterOil since 2011.
Some InterOil longs, like Seeking Alpha writers Sam Tibbs and Resourcearb, have compared InterOil's selling of its assets to that of Cove Energy. In this article I compare the bidding process between the two companies.
Cove Energy was a junior oil and gas company that traded on the London exchange. It specialized in oil and gas wells in Mozambique. It put itself on the market to sell itself in January, 2012. A bidding war ensued, and it got a significantly higher price for its assets than its market value was at the time. The bidding process that happened with Cove was much different than what's happening right now with InterOil. Let's compare the two.
Cove Energy's Bidding Process
Cove said in December 2011 it had offered data to parties who had expressed an interest in acquiring its 8.5% stake in the Rovuma Area 1 block in Mozambique, a natural gas project which is led by Anadarko Petrolem Corp.
In early January, 2012, Cove put itself up for sale. Analysts said the company could be worth some $1 billion. Starting in February, companies started bidding for Cove. All the bids were public, and each higher bid caused the stock to jump higher.
On February 22, 2012, Royal Dutch Shell Plc proposed a $1.6B id to acquire Cove. The stock jumped 25.13% that day since the bid was considerably higher than Cove's share price at the time.
Two days later, Thailand's state-owned PTT Exploration launched a $1.8B counter-bid.
On April 24th, 2012, Shell matched PTT's bid with the endorsement of Cove's management.
On May 23, 2012, PTT trumped Shell's offer again with a late $1.9B bid. Cove shares soared 11%. In June 2012, Shell decided to drop its Cove bid. PTT won the bidding war, acquired Cove, and had Cove's stock delisted.
Now let's look at the chain of events for InterOil's bidding process.
InterOil's Bidding Process
InterOil has been marketing itself, or parts of it, for sale since 2007. If you look towards the bottom of this recent article of mine, you'll see quotes from InterOil's CEO, Phil Mulacek, that date back to 2007. These quotes were meant to get investors excited about a potential partnership with a major oil and gas well operator. So far, no major operator has stepped up.
On January 24, 2013, InterOil announced that "it has advised bidders with which the Company has been in discussions that the final binding bid solicitation period for the partnering process currently being undertaken will close on February 28, 2013."
On March 1, 2013, InterOil announced that several bids have been received to partner with InterOil, and that its advisors are now evaluating the submissions.
On March 1, 2013, InterOil filed a $1 billion securities shelf.
On March 25, 2013, InterOil announced its completion of its Farm-In agreement with Pacific Rubiales (PRE.TO). The announcement said: "On March 23, 2013 , PRE funded the final payment of approximately US$55 million under the Farm-In Agreement. Together with previous payments PRE has funded the full US$116 million cash payment due under the Farm-in Agreement. Additional payments of PRE's drilling costs for the Triceratops-2 well are scheduled to be paid in the coming months."
Comparison Of Cove And InterOil's Bidding Process
There are stark differences between the two companies' actions during their bidding processes:
1. Anadarko, a major oil and gas operator, was leading the Mozambique project that Cove owned a part of. InterOil doesn't have a major operator leading its Elk/Antelope wells, so there's more risk that the project wouldn't go well.
2. When Cove decided to sell itself, it immediately got a bid for its assets the next month. InterOil hasn't been able to find a fully committed partner since 2007.
3. About a month after Cove said it was for sale, there was a bid for its assets from Shell that was made known to the public. Why isn't InterOil making its bids known to the public? I think it's because the bids probably aren't very good. Believe me, InterOil would shout any good news from the rooftops and send out several PRs about the bids if they were good. InterOil had hired John Thomas Financial to pitch its stock in a boiler room. It has also had over 200 press releases about its exploration progress. It isn't the kind of company to keep good news quiet.
4. Cove had caused a bidding war after putting itself up for sale. InterOil stated on January 24th that it had been in discussions with interested companies for a while. InterOil then claimed "several bids" came in on February 28th. It has now been over a month since then. Why is it taking so long if InterOil was already in discussions with these companies several months before?
5. With Cove, each bid was transparent, public, and simple. Not so with InterOil. InterOil announced that "several" bids were received for a partnership. Several means at least three, correct? Or possibly more than three, but definitely more than two, right? Are these several bids between at least three different companies or did one company offer more than one? Were they all from major operators? So for example, did Shell, Exxon, and Total each give a bid? Or did one company make several different bids, for example did Exxon bid $350 million for Elk, $1.5 billion for Antelope, and then a $50 million bid for Triceratops? What constitutes a bid? For example, if I called up InterOil and offered them $10 for Elk, would that count as a bid? (That's an exaggeration but you know what I mean.)
6. InterOil files a $1B securities shelf (rut roh!). It seems strange for InterOil to be getting ready for a capital raise. If it is going to receive a lot of cash from an asset selldown, why does it need more? Could it be that InterOil will end up saying:
"After speaking with our advisors, we have decided to take a contingent bid from (*random oil and gas company*) and do the rest of the developing ourselves. We're issuing a secondary offering of a million shares and borrowing $250 million more"
7. InterOil announced that it has received the remaining funds for the farm-in agreement with Pacific Rubiales (PRE.TO). Why is it making that known now in a press release? Why not just mention it in the next earnings call?
This farm-in agreement doesn't have anything to do with the selldown events, those have to do with Elk/Antelope. PRE's farm in agreement has to do with Triceratops. Also, as it says here, the farm-in agreement is refundable to PRE if milestones aren't reached. Since PRE isn't really committing anything, it's not an equal-risk partnership.
Also could it be inappropriate for InterOil to now be spending time trying to get funds from PRE? Isn't it supposed to be wrapping up a deal that its shareholders are anxiously awaiting? Or did InterOil go to PRE now in order to ask for the rest of the funds to blunt the bad news of an inevitable shoddy deal, or no deal at all? I believe that to be the case.