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Executives

Wayne W. Andrews – Vice President-Capital Markets

Michael Hession – Chief Executive Officer

Collin Visaggio – Chief Financial Officer

Analysts

Evan Calio – Morgan Stanley & Co. LLC

Pavel S. Molchanov – Raymond James & Associates, Inc.

Chris McDougall – Westlake Securities LLC

InterOil Corporation (IOC) Selection of Total SA for PNG Gas Development Conference Call December 6, 2013 10:30 AM ET

Operator

Ladies and gentleman thank you for standing by and welcome to the InterOil Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions being given at that time. (Operator Instructions) As a reminder, today's conference call is being recorded.

I’d now like to turn the conference over to our host, Vice President of Capital Markets for InterOil, Wayne Andrews, Please go ahead.

Wayne W. Andrews

Thank you, operator, hello everyone. This is Wayne Andrews, VP in 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 laws, 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.

At this time, I’m going to turn the call over to Dr. Michael Hession who will be conducting the call. Please go ahead Michael.

Michael Hession

Thank you very much ladies and gentleman. I’m calling you from Singapore having just landed from Papua New Guinea at Port Moresby. We will [indiscernible] today, we entered into an agreement with Total with respect to Elk-Antelope. I’ll talk to you about that in a minute, we’ve literally just arrived from the airport and we now are going to go through our conference call. We will take questions later on, but I would like to go through some context.

As I have talked about and foreshadowed in a number of audit questions, we’re working with InterOil in a [indiscernible]. Initially we look towards creating stability in the company. Our next focus was the deal, the deal with [indiscernible] today. I will be spending the majority of the call…

I apologize for that interruption, I’ll continue. I will be talking mainly about the deal we’ve done with Total today and giving some degree of clarification around that deal.

Other than that, talk further about an update with respect to our exploration licenses.

Now as I said earlier on the year, it was all about greater stability in the company. We won’t spend too much time on that. We are adequately funded and we’re going at cost reduction program and most significant part of the recent history with respect to individuals it was like half the day. I am very, very, very pleased to tell you that we have delivered on the Elk-Antelope deal.

We said early on that we would execute the deal by the end of the year. Well today and the first week of December, we’ve done exactly that and I’d hoped that this will create [Technical Difficulty] Apologies for that.

I will continue here. Our [indiscernible] of delivery, so first of all, we’ve done a deal with Total. What we are going to do within the next couple of hours, perhaps a little clarity, I gave a guarantee that it would give the market the ability to value this deal. We will be launching the sales and purchase agreement on the SEC and at SEDAR the USA and Canada. That will be available within about four hours, so we launched today, launched the same day that we are going to do the transaction.

With that SBA, you will be able to understand the [indiscernible] and in fact the exact detail of the deal. You also need to buy that with our latest researchable GLJ. Combining the SBA and the related researchable, we will give you a good understanding of the value of this deal.

Now ladies and gentlemen, there is a range on this deal and I'll talk you through the detail of that later in this call. We will also follow up at the end of this call with a clarification press release. And an announcement that today we have received from Mr. Duma the retention leads that PRL 39 [indiscernible], latest news we have received our first retention lease that was awarded back to us today on payroll 39. We'll also be talking about Minister of Energy's comments around our renewal of our exploration licenses.

So really there has been a lot of news to date and a lot of very good news. So first of all, Total. The only question is why we chose Total. Well, it was all around the certainty of development. I always maintained the degree of confidentiality about who the competitors where. I also used that with competition right up to the finish line. There was competition marked up the final date. I will not be telling you to do the competitors work but let me say there were multiple [indiscernible] in pursuit of this asset.

We chose Total for a number of reasons, certainty of development. Total are highly incentivized to develop a business in PNG. They gave us a shortage that we'll be moving forward on this Elk-Antelope development and we saw enthusiasm and excited to develop this in that team. Total [indiscernible] gave in a sense that we have got just the Total. The upside, Total also within the SBA have rewarded InterOil for not only potential increases in a good solid resource, but they also rewarded InterOil for future gap that we will find in PRL 15.

Final pair of this deal. So Total brought to the table our rewards for growth in the existing reserves and also any future exploration affiliates in PRL 15.

The nature of our agreement is a one on the value chain. We have an option directly bring Total into our exploration acreage. We are very keen to do that, because what we see is further gas discovered not being stranded. The best way we can see that happening as if we are aligned and incentivized to bring it into this new plan on Elk-Antelope.

Now, the commercial side of things. Yes, Total did put forward the best commercial options, I’m going to talking through some of the deal metrics, I am going to talking to a pricing table, and then I am going to give you some indicative value around some potential volumes. Again you will be able to take this part, when you the SPA which will be put on as I said, the SEC platform and the SEDAR platform within three hours.

First of all, as a deal metric, that says a fixed payment, the $613 million payable at completion and $112 million payable, FID, these $100 million payable at first cargo. And then, very importantly necessary to resource payments. Now these resource payments as you would expect will vary with respect to the results. We will be undertaking an appraisal program look for three wells.

Elk-Antelope to further define the resources. There will be sort of the moment our three main tranches of payment. I'll go through those tranches. Now I will be issuing both this in a press release immediately after this call and the table and you will be able to see in the document it self which has been signed by InterOil and Total. The charge is up 3.5 Tcf to 5.4 Tcf. InterOil will be awarded net $0.77 per Mcfe or pre-given backing, $0.60 per Mcfe.

Now, let me just explain a little bit there, the PNG Government should back-in the 22%. So as a growth number, I describe it to you and the net number. So I’ll repeat that between 3.5 Tcf and 5.4 Tcf growth would be awarded $0.60 per Mcfe. Both in the back-in that net down to a reward to us of $0.70 per Mcfe.

Second tranche, is between 5.4 Tcfe and 6.5 Tcfe. Growth are pre-given backing will be getting $0.80 per Mcfe, got a quite net to $1.03 Mcfe. So once the government is investing, you get $1 for 0.03 Mcfe.

Now when we go on to 6.5 Tcfe anything above 6.5 Tcfe and it is $1 pre-given backing. And post-given the backing, it is 129 Mcfe. Now very, very important during the signing these numbers are uncut, I repeat uncut, so if we went through to a 10 Tcfe resource. We will get paid next $1.29 Mcfe and you will be able to see this in the sales and purchase agreement which I said has been launched at SEC and SEDAR within three hours. We believe these are extremely attractive commercial terms. I am very pleased with what we feel it today.

Now let me give you an example, one example and which again will be in the press release and can be worked independently when you have the SPA. So for instance, if the resource is 5.4 Tcfe, we will be rewarded to $1.5 billion. If the resource is 6.5 Tcfe, we will be rewarded $2.1 billion. If the resource is as good as the GLJ certified in that case, so the GLJ 35 resource that we will undertake as a company which is 9.89 Tcf, we will be rewarded to the order of $4.2 billion. Now there is a high take in the GLJ report of 11.79, we will be rewarded for that $5.3 billion and it carries on uncut.

If the thing grows the asset, everything above 6.5 Tcf post-given back-in will be rewarded by an incremental 1.9 net Mcfe. Again, we think that is very, very, very favorable commercial terms, so very, very pleased with the results today.

Now on top of this as I alluded to the [indiscernible] with the prime minister announced the winner of the private partner, the third partner for InterOil was Total, Minister Duma [indiscernible] to renew for [indiscernible] un-discovering PRL 39. We have that. We now have that lease renewed, and the Minister of Energy went on record back to Prime Minister that we will be getting our exploration licenses renewed, and we will be bringing forward that transcript, we are putting that on our website so people can read that for themselves.

Now the other aspect of the deal and by the way, I said I will just come down. There are other aspects of the deal which hasn’t lost mentioned to you. We have a carry on the appraisal program that is the fully carry on the appraisal program for three wells as I said, three wells which will allow to appraise it.

In terms of exploration upside, I talked a little bit about the fact that we would be rewarded in PRL 15 for undiscovered gas. We will be rewarded $100 million per Mcf of the first Tcf that we discover in PRL 15. So, for instance, if we find 10 Tcf further, we will get $900 million. If we find 11 Tcf, we’ll get $1 billion and that will be payable at first cargo with respect to Elk/Antelope development. We will also be carried on an exploration. We’ve talked about an exciting exploration prospect in PRL 15. We will be carried on that exploration well.

Total have also agreed with us that we will work together on other areas outside the Gulf. Now that is the respect to the profit of our business and potential opportunities in the region outside the Gulf in PNG and possibly outside PNG. So this really is a transformational deal that we’ve done with Total. It’s about value chain alignment. It’s about monetizing the gas resource without being restrictive, without being kept on good terms and about working together in the exploration license space.

I would love to think that this is the first of many trends or many developments we would do with Total. That’s what stands behind the essence of this deal and that’s what stands behind as Total said today, we said today in Port Moresby. There are relationships that we’ve started today. Now that is the main part of the deal. I’ll reemphasize. I said in my last conference call, I would give you absolute line of sight to be able to value this deal and that’s why we’re putting the SPA launched on the SEC platform and the SEDAR platform today within hours of completing the deal.

You already have the information you need around GLJ. I think that will allow people to work through the new offers of the deals and come up with revenue independent valuations. The work sheets that I’ve just talked about, I’ll actually be issuing after this call in the form of press release, but also in form of the press release the recent notification that we received of [indiscernible] retention lease.

So with that in mind, I think it’s an amazing day for the company. I’m really, really, really excited and I’m really, really pleased with the management team that’s been able to deliver on its promise of bringing in a transformational deal before the end of the year. Now what we’ll do now is I’ll open it to questions. I’ll hand over to Wayne. You can put through the questions. Thank you for your time.

Question-and-Answer-Session

Operator

Thank you. (Operator Instructions) From Morgan Stanley we’ll go to the line of Evan Calio. Please go ahead.

Evan Calio – Morgan Stanley & Co. LLC

Hey. Good evening, guys. Congrats on the discovery I look forward to seeing the sales agreement, which sounds better than the acquisition read on the press release. My first question is just to be clear. You said you will be rewarded $1.5 billion to $4.2 billion gross consideration based upon the resource range in your progression, meaning should we reduce those consideration numbers by the 39% of Total’s purchase, which is held by the IPI holders or could you explain how they are being treated here and what their rights might be going forward, is there a different interest in the four wells?

Michael Hession

I can tell you that the IPO, this deal will be between InterOil and Total and the IPI holders and any of the holders will no longer be on the license. So what I’m describing to you today is a deal between InterOil and Total. I’ll just go back through the numbers there, because I’ve got the numbers in front of me.

As I said, 5.4 Tcf is $1.5 billion, 6.5 Tcf is $2.1 billion, 9.89 Tcf is $4.2 billion and 11.79 Tcf is $5.3 billion. So that’s the number clarification and I’d say this is between InterOil and Total. And we’ll be making a future announcement with respect to the IPI and any of the equity holders in PRL15.

Evan Calio – Morgan Stanley & Co. LLC

So would you have to make some payment that’s within the consideration Total is paying you to clean up the IPI holders?

Michael Hession

Yes, you got it exactly. Our aim is to actually do effectively a pass through deal, a value neutral deal. Value neutral deal with the IPI holders and we had some very fruitful discussions in that space, but we’ll be making an announcement about that in not too distant future.

Evan Calio – Morgan Stanley & Co. LLC

Okay. Secondly, as you mentioned, the deal was variable based upon resource. There’s been various views upon your positive resource estimate over time. I mean Total seems to contemplate the lower end. You even cite a level below your P90 estimate in the press release. Any comments on the resource or what your views are on that resource and whether or not GLG will be one of those auditing entities or that’s been determined yet?

Michael Hession

Yes, look, I wouldn’t draw into Total being folks in the lower end to that. I mean Total have used a number of 5.4 Tcf, which is, as you know, is the star of the second tranche. It’s a range and what Total have done today is they’ve described part of the deal and you’ll be aware that, I mean, Total factored in a possible sell-down of 19.3% and they’ve used the number at the start of the first tranche, which is 5.4 Tcf, which gets you to $1.5 billion and therefore I think back down – the sell-down is 19.3%. Then they have a net 32%.

So what we’ve done today is, I mean Total quite reasonably have described part of the deal, which I think is significant, and they’ve factored in a sell-down. So they’ve really talked about how much this may cost them on one particular point, that first tranche and having sell-down. What we are doing is we are putting the whole deal in front of you, the whole SPA and showing you the whole potential range.

Now, I understand that there could be some people who are trying to match what Total are saying and what we are saying and as I said, they have brought this very much on one part of the deal and where I think it will go in terms of the sell down, and I’ve used one particular number at the start of one of the tranches.

Let me go to and I’ve given you a fuller description obviously it seems like the $100 million to TTS, and I’ve given you a fuller description in terms of the carry. I’m trying to give you a complete description, oh, I’m not trying – I’m giving you a complete description of the whole transaction, and that’s why I’m putting the FBA out probably to read immediately.

Now to your question with respect to where do I think this thing is going? I think it is entirely reasonable that we will be in the GLJ range. Yes, but we are drilling the price of well and the fact of the matter is, we’ve driven price of wells because this thing needs to be further priced.

What we have, is we’ve had and I have talked about it in previous calls, I had independent expert look at this, we’ve got independent reserves expert look at it, everything we are getting told, is that we’ve done the in the range of up towards the range what GLJ has set at 9.89.

The actual answer is I won’t know until we do the [indiscernible] of price of wells in the ground. And so I think it’s better for me to be transparent and show the range of outcomes. So if I take it from 5.40 which is just literally the start of the year – the top end of the bottom tranche, and I go up to the top end of the high case of GLJ, you see our quarter range of $1.5 billion to $5.3 billion and there will be some cash. If we discover another extra 5 Tcf on top of that move we will be literally rewarded. And we don’t have to be fair to Total. Total group will be paying for the molecule and on the downside if it’s less sales we get paid less, but also it’s very important and there is no capital mix.

So if this field grows and grows which we obviously hope it will, we will be richly rewarded for that. And actually Total will make a lot of money out of this as well, as we develop more tranches.

Evan Calio – Morgan Stanley & Co. LLC

Another question just on the deal process, I mean, can you comment in terms of where the sizing tensions on the deal where meaning where you trying to maximize the percentage that PRL but you help post deal and if so, what was the premium that you valued on the interest held versus the interest sold?

Michael Hession

We were driven actually more by doing a fair deal that included a certainty of development. So I never wanted to get in a situation. There is certain things I would not have done, okay and I will give you an example of that. A huge amount of money paid for instance FID. Because if you have a huge premium FID, let’s say Total will have to pay me $3 billion, $4 million, $5 billion FID. There are actually [indiscernible] your chance of getting this thing away.

So we were using what we did as a series of payments which we don’t do fair and those payments as we said once its completion, once FID once its first called out and obviously once it’s received those certification for this pool, so it’s spread evenly, so you don’t get unusual behaviors in a JV.

The aim of our process here was to get the development away and therefore a credit situation, where if there is upside we get rewarded for reasonably but not selling reasonably that encouraged Total not to develop these things.

And now in terms of actually the resource payment, diesel price will go down. You will see in the SPA, we’ve got an ability to actually call when that reserve certification gets nice.

Now that’s good because if you fix it on a particular point you could get actually gain the appraisal protest, but what we folks have done is, look we can call it and because we can call it and we’re getting two sets of independent orders or certified in. So we’re just trying to take all the ability and we work together here, we’re trying to take all the ability to gain this out to make sure this thing got developed in the best way for both companies and for PNG.

So I didn’t focus on a premium, certain time or certain percentage. And we’re trying to make these things look reasonable right through the lifecycle of the development.

Evan Calio – Morgan Stanley & Co. LLC

Right and it’s in the variable – the amount due upon the appraisal, you’re saying that’s due, once the appraisal is complete which is expected to be 2015?

Michael Hession

Yes. We’re going to put them too low before we go to next year, and we’ll get a little bit moving that program through it. And we’re very confident that we accept of the 5.4 Tcf and we think we can go further in that, and then we will get rewarded when we call up for reserve certification after those three appraisal vote.

Evan Calio – Morgan Stanley & Co. LLC

Great. And lastly if I just could, just to square the circle, you say that you get paid for any upside for gas and PRL 15, that’s $100 million per Tcfe yield or a Tcf discovery. It takes that there is one well, is there a one exploration well or is it one exploration well per structure that defines the upside, I know these are detailed finance to EBITDA amount.

Michael Hession

There is one exploration well, we get [indiscernible] and we’re quite frankly there is a very large prospect that we wish to test, and that is the major driver for us to pay around 15. And we were very keen there is a large prospect that could be it’s an exploration prospect obviously that could be of a similar or bigger size of Elk-Antelope. And we were very concerned that we got rewarded, if we made a discovery in that space. So it’s largely driven by that one prospect, a very large prospect that we’ve got and we will be – I am sure you can more about that in the future.

Evan Calio – Morgan Stanley & Co. LLC

When should be that of the next tranche of wells or even that would be running to four that you have planned here starting now into 2014? When do you expect to drill that prospect, that exciting prospect?

Michael Hession

Look I expect reach the backend of 2014 or 2015. We are planning here at the moment we’re defining it and it will depend a little bit on how it’s going to decide they comes up. But what I can’t tell you is all the parties who were injected and looked at this transaction, real excited by that prospect, again I am going to caveat this. It’s exploration, it’s an elephant.

Evan Calio – Morgan Stanley & Co. LLC

This is great and this is I guess what I said last, but learning it back here are you biggest last year. Is there any change to the rig count now that you get move to three appraisal wells and this exploration and you have more significant funding? Going forward did you expect to ramp the recount even more?

Michael Hession

Well, I’ll be honest with you. I am considering it. We’re in a position where we’ve got four. They’re going to do some further work and there has been things that have turned up the due diligence of the company. They have looked long and hard, now that’s the team and to consider asset rate. So we are considering that. We’re scoping it. We’re actually in discussions about it, but we’ve not yet committed to that. But you are getting extensive work going, yes?

Evan Calio – Morgan Stanley & Co. LLC

Yes. Great. Look, I appreciate. I look forward to seeing the SPA, I look forward to seeing your guys market in the back of this deal.

Michael Hession

Okay. Good one. Thank you very much.

Operator

Thank you. The next from Raymond James, we’ll go to the line of Pavel Molchanov. Please go ahead.

Pavel S. Molchanov – Raymond James & Associates, Inc.

Well, guys, and congratulations. It’s been a long time coming. Can I ask first about taxes on this? So will InterOil has to pay income tax in I suppose any of your jurisdictions on, for example the $630 million upfront payment?

Michael Hession

I’ve got Collin in the room here and I’m pretty sure I have the answer to that, but I’ll pass off to Collin.

Collin Visaggio

So what Total apply is that each in the lot, which is related to a capital within – in PNG there is no capital in that.

Pavel S. Molchanov – Raymond James & Associates, Inc.

Okay. And that is applicable to both the upfront payments and any future variable payments. Is that right?

Michael Hession

All these payments are related to purchase price for the acquisition of a lot.

Pavel S. Molchanov – Raymond James & Associates, Inc.

Okay. That’s clear. Thank you. On the certification and appraisal process, you’ve indicated that the wells will be drilled by 2015. So does that mean that by some time in 2015 it will be clear what the ultimate transaction value is that InterOil stands to receive or is that going to take some time beyond that?

Michael Hession

I think, I expect by 2015 we’ll have a very good idea. The answer for that is if it’s still going north we may have to be knock down to 2015 because there is a second certification we’ve got in the FDA, which you’ll see, which captures the upside. So we’ll have it in 2015, but if we still say, let’s say, there is another potential four, five, six, seven Tcf as we appraise it. We’ve got to do a second certification in there what we can call and that would mean we would get another tranche of where we got real understanding possibly in 2016.

Pavel S. Molchanov – Raymond James & Associates, Inc.

Okay. Okay clear. And then last one from me, and I apologize if perhaps some repeating question I was previously asked. But can you state precisely what will happen to the indirect participation in first holders as part of this transaction because in the press release it looks like their interest will be zeroed out, following the conclusion of the transaction.

Michael Hession

Exactly. You’ve got it. That’s exactly what our folks look like and that’s exactly what’s going to happen. And we’re not going to like it.

Pavel S. Molchanov – Raymond James & Associates, Inc.

So who is buying them out?

Michael Hession

We are.

Pavel S. Molchanov – Raymond James & Associates, Inc.

You’re buying them out for cash or equity?

Michael Hession

That’s on both at the moment, but let me tell you it will be neutral but we’re expected to do. But the exact amount is to be determined and we are in advanced, very advanced stages of that purchase at the moment.

Pavel S. Molchanov – Raymond James & Associates, Inc.

And when do you think that will be finalized. Would you say that will be before the…

Michael Hession

Yes. I’m hopeful that that will be finalized no later than January and actually, let me be cautious no later than January. Let me try and continue to under promise and over deliver.

Pavel S. Molchanov – Raymond James & Associates, Inc.

Okay, all right. Thank you very much.

Operator

Thank you. Then due to time constrains the last set of questions will come from Westlake Securities in the line of Chris McDougall. Please go ahead.

Chris McDougall – Westlake Securities LLC

Hello gentlemen and congrats on the deal announcements. So the exploration well and the exploration in general, I want to makes sure I understood how that was treated. It’s not related to the appraisal but due to an exploration well in PRL 15, if you find let’s say, 2 Tcf gas or a bigger number you will get $200 million and you will own 30% of that gas that’s found, and you won’t have any – none of that gas will be applied for the Elk-

Antelope levels that you gave, that were more like $1 in Mcf, correct?

Michael Hession

Yes, almost correct, and let me just go through it. First of all, we are getting time wasted for that well. Okay, secondly it’s a 5 Tcf, we get $400 million. So the first Tcf Total get free, so the way you describe it was 2 Tcf in $200 million, it was 2 Tcf, it will be $200 million, okay, $400 million. So the first Tcf they get free, so let me give you an example, it is 11 Tcf. We would get $1 million. Is that clear?

Chris McDougall – Westlake Securities LLC

Yes, so that‘s clear and then…

Michael Hession

So I’ll just finish answering your question. You’re absolutely right and given its undiscovered gas, we didn’t expect the counter party Total to pay more effectively would be $1.29 Mcfe for discovered gas, I mean that’s just unheard of and unreasonable. So you’re absolutely right, it’s a separate payment structure for the exploration. Also there is a payment structure for discovered and to be appraised gas and there is a payment structure for yet to be found gas. You basically got it right apart from that new ones around…

Chris McDougall – Westlake Securities LLC

Okay, I got it, so in the limit that you sound very hard resource it would be delight in paying effectively $0.33 an Mcfe for the gas, disregarding the 1 Tcf that they get for free, so…

Michael Hession

It’s in that.

Chris McDougall – Westlake Securities LLC

Yes, okay. This won’t be mindful of our time here, so you’re going to have a 30% stake in that LNG project afterwards, then you’re going to not carry but you’re going to be making your capital commitments just as oil search has made it’s capital commitments for 29%. Is that comparable, I mean was that part of what you’re looking out here with the transaction, getting to that sort of a manageable percentage for a company your size to go forward?

Michael Hession

Yes, I think it’s fair to say, I’m sure we also went through the same thought process. We didn’t specifically use those search we did a fair bit of work in the market and through our colleagues and other members and staffs. And we came to conclusion that was a combination of a manageable amount, but also sufficiently material. And I’ll go back to it. One of the major captions attractions of working with Total is they were keen to – for us to have a material positioning here, which would make a real difference to this company, I talk about transformation. I mean 30% of an LNG project, that transformation of InterOil that’s was so exciting about it.

Chris McDougall – Westlake Securities LLC

Yes, great. And can you give us an idea of the split between – we know that 6/11 is getting paid effectively first quarter of next year but then the other payments for the additional gas about threshold, I understand that some of those are split at certification and some are split at FID and then maybe some other split, but can you give us a rough percentage before we see it in NASDAQ?

Michael Hession

Well the percentages, I mean I can give you the precise figures, it’s $613 million completion, it's a $112 million FID and $100 million of first cargo. So those are the absolute dollar numbers. Now, the fix is obviously the retails payments.

Chris McDougall – Westlake Securities LLC

Right, that was what I was asking about.

Michael Hession

Yes, so look. I think that’s very similar to [indiscernible] assets. It’s going to be a predict 2015 where we’ll be getting that retail payment. But I also would like to remind you there is a second certification event which would I don’t know when we’re going to call that because it’s a wild card and we can call it when we want to, but you could get that could be called in 2016. Yes, I mean, again it’s going to depend how the things get appraised and how the thing grows.

Chris McDougall – Westlake Securities LLC

So there are two resource certification that you get the right to call the timing of each one.

Michael Hession

Of each one?

Chris McDougall – Westlake Securities LLC

Yes, you said there were two.

Michael Hession

Yes, there are two. One is the dependency price and program. Yes, so that’s not really having to negotiate the [indiscernible] program and then there is a wild card. So the wild card is the one that we can call when we want to and so the wild card we can call that within a certain period, but the first one is after the third appraisal well.

Chris McDougall – Westlake Securities LLC

Okay.

Michael Hession

The reason for that, I want to be clear about it. The reason for that is it can’t be gained. We can’t put appraisal well at certain locations or we can slow down work et cetera, et cetera. It will just allow us to operate this thing properly. And party won’t know when we’re going to call it, just going to get on with it.

Chris McDougall – Westlake Securities LLC

Okay, fair enough. And sort of circle back to the resource payment and the timing. So taking your upside scenario here of 11.8 Tcfe and coming on low, and that would be a resource payment of $5.3 billion close to the IOC and the IPI interest. So that would be payable upon certification like all of their platform three or would that be spread out between certification and first half?

Michael Hession

So we just going to go to, just to be clear, everything over 5.4 Tcf is what is payable at certification, okay. So to your point, we’ve got 11.8, we will see this in the table, 11.8 Tcf, we will get $5.3 billion payment, yes.

Chris McDougall – Westlake Securities LLC

And when is that paid, that’s at certification, just to be clear with the audio on the line?

Michael Hession

There is two potential sides and I am sorry about this, because we have deliberately made two certification events here. So here is an example; we could get some way along that line. Let’s say, we got to 7.5 Tcf or 7.9 Tcf, okay. Let me tell you, we have got to 9.89 Tcf at the end of the three appraisal wells, then we will be looking at the $4.2 billion payment.

Now if it grew further and we called it and when it reached 11.79 Tcf, we get further payment, and I can totally understand people want to know exactly when the payments will be made, but we have deliberately structured it, isn’t a specific time, because historically when you do these deals and I have been evolved in this before. When you say that it’s going to be a certification event on January of 2015, what happens is, one party will try to gain it, so the reserve state below that and suddenly the reserve jumps when you get past generally the 2015.

So we actually got the ability to move them around. When you move them around, people can’t gain the reserve certification of particular day. Am I making it clear?

Chris McDougall – Westlake Securities LLC

Yes, I think the investors point clear is, I will take that for the cash flow and I don’t think investors are concerned about if it came as the first certification or the second or what is more does it come at certification event, which is viewed as the next two, three years or does it come at first gas which is no longer?

Michael Hession

Okay, excuse me, all right. There is no doubt there will be a certification event in the next two three years. So there is no plan that it will be out like in seven years time or six years time. That’s what you worry about now, that’s not the plan. What we do have is, again I will go back to, we have the ability to call a wild card, the principle of wild card later and we can call that wild card as late as 25% of the way through to production, because as you know these things come on line, right and you start to understand how much cash you have actually got. So what we have created is a window where we can call that wild card.

Chris McDougall – Westlake Securities LLC

Yes, and that’s fantastic Michael. I will say, I mean, honestly that’s something that I was thinking about, and that is going to indicate that you have done this before, you have seen a number of the things and you’ve engineered this deal appropriately. From an investor standpoint, it’s more of, am I going to have to wait to see this cash for a long time, and I think we are crystal clear on whatever this resource payment and that been, the vast majority of it will show up at certification. and so you can just confirm that again, but…

Michael Hession

Yes, look, I think you’re right, but again, we could get a real nice price and that’s why we’ve got the wild card. I think on the balance of probability here is absolutely fine, but we cut the wild card just in case something geologically unusual happens, and that’s why we structured it. So we don’t sit there and lose it.

Chris McDougall – Westlake Securities LLC

Yes, that’s fantastic and so I guess what I would like to just, if you could the numbers that you ran through again at the beginning of the call, since it might take a while for that to get released maybe by – I’d appreciate it, if you just ran through this pay down levels again so we can draw our map.

Michael Hession

Thanks let me do that. But we would hopefully get this down within an hour, but let me give you so the payment and completion is $613 million, the payment FID is $112 million, the payment at first cargo was $100 million, and then I am going to go through the pricing table, okay. But the first tranche is 3.5 Tcfe to 5.4 Tcfe.

And that will give you exactly why Total put 5.4 Tcfe, they just picked that point. The second tranche is 5.4 to 6.5 Tcfe and the third tranche is everything over 6.5 Tcfe, okay. Let me go through how we get rewarded. In that first tranche which is 3.5 to 5.4 Tcfe.

Chris McDougall – Westlake Securities LLC

So everything over 6.5 Tcfe is the last tranche.

Michael Hession

Yes, exactly.

Chris McDougall – Westlake Securities LLC

Okay, okay.

Michael Hession

All right. So if you go three tranches, right.

Chris McDougall – Westlake Securities LLC

Yes.

Michael Hession

Looking at certainly with two numbers, pre-government backing growth, that $0.60 an Mcfe. Now when you assume that the PNG Government come in and say 22%, it actually is net $0.77 Mcfe, okay. So first tranche is $0.60 gross, $0.77 net, second tranche is 5.4 Tcf to 6.5 Tcf that is gross $0.80, net $1.03.

Chris McDougall – Westlake Securities LLC

Yes.

Michael Hession

And the final tranche is 6.5 Tcf, okay, gross everything over 6.5 gross, we get a $0.01 as $1 Mcfe and when you net that that’s $1.29 Mcfe.

Chris McDougall – Westlake Securities LLC

Great. And those are all marginal numbers, so it’s just like income tax as you go you get on the margin between that. And then I think we’re squared away on the IPI orders, but it sounds like it’s for modeling purposes, it’s going to be completely pass through. So if we take Europe 58.6% net working interest, going into this deal after the government would back in and multiply it by these figures, then we should get the value that will end up to you and then there will be kind of pass through economics IPI orders?

Michael Hession

Yes. I mean we make some assumptions about what the volume is and obviously therefore what the price is. So yes, definitely my objective is they were going to value neutral deal and so my objective is the IPI gets fairly rewarded and they get rewarded for what market price and obviously, we’ve established what the market price is in for that.

Chris McDougall – Westlake Securities LLC

Okay. And then lastly for valuing the LNG project, the Company a couple of years ago PRE joined putout a presentation as part of the Investor Day that gave some cost estimates for an LNG project using your resource and it had some operating costs and so forth. So recognizing that all of this will be part of the FEED study, I was just curious if you would have a chance to review that and had any general sense on if the operating cost were in line with expectations aside from maybe some inflation and so forth, because those numbers are much lower than some of the other industry examples and those maybe had their own things going on.

Michael Hession

Quick looking, too early to. We’ve got to do this BOD, we’ve got to do this FEED. You’ve got to understand the engineering, you’ve got to understand the market when you go after these things. I don’t think we’re totally unreasonable to use PNG, LNG numbers if you will look into through the guidance. But I can’t comment on numbers correctly by this company two, three years ago in a different market, in a different engineering scheme. And so, I’m not even going to reference those. I think the answer will be very clear when we do BOD and FEED and actually we’ll only know what these things costs when we go out and bid it. And that has been obviously…

Chris McDougall – Westlake Securities LLC

Okay, fair enough. And GLG or GLJ will be one of the certifiers or is that to be determined?

Michael Hession

Now GLJ will not necessarily be the preferred one. We are going to be able to choose our own certified. The Total will be able to recommend a certifier. We’ll recommend a certifier. We’ve not decided to do that as yet.

Chris McDougall – Westlake Securities LLC

Okay.

Michael Hession

I’m not saying it’s not GLJ. I’m just saying we’ve got flexibility there yet.

Chris McDougall – Westlake Securities LLC

Okay. But you need to choose one. You need to choose one.

Michael Hession

Yes. What I like about it is that Total gets to choose one, we get to choose one. Yes, so, it’s absolutely fair.

Chris McDougall – Westlake Securities LLC

And then little bit different, it averages or it’s got to be within some tolerance range?

Michael Hession

It averages.

Chris McDougall – Westlake Securities LLC

And it’s like a – and it’s a Q2 number that everything is based upon, correct?

Michael Hession

Yes.

Chris McDougall – Westlake Securities LLC

Okay. Thank you very much and congrats on what you’ve just done and all the transparency. It takes a little bit to get through the various complexities, but we appreciate the transparency and look forward to going forward.

Michael Hession

Okay, great. And what I will say, thank you very much and thank you for the question. But really it’s all about looking at the SPA, and as I said before, our aim is to give everybody an absolute ability to see through the value and go through the SPA, study it, look at it and then we will take questions on it and we can take – we will take certifications. We’ll, no doubt, be visiting some of them. We’ll be back on another conference call I’m sure in the not too distant future. And it is quite difficult. These LNG projects are based on complexities.

These sort of transactions and big and complex and what’s I believe will describe reasonably well today and I think it’s important that one looks at the SPA and you get to see the nuances of the deal. Okay. Are we taking any more questions or are we done? And across to you Wayne.

Wayne W. Andrews

Well, hello. Moderator, I believe we’ve run out of time and we’re going to end the call. Do you have any closing remarks, Michael?

Michael Hession

Well, I’m pretty happy. It’s probably my closing my closing remarks. I came into this company to do a number of things and to ensure that we were stable, we were spending not money prudently and we were well finance. Well, as you see, we’ve done that and we’ve delivered in that space. I came in to a broader team in to deliver on Elk-Antelope.

Elk-Antelope is ready to be move forward to a development. I felt that quite strongly when I joined the Company and I had a target and I didn’t tell everybody also later in the place what the target was, which is the end of the year and I believe that now we’ve delivered ahead of time there.

The exploration licenses, well, that’s actually going better than we told. We obviously got Triceratops today. We got sureties from the PM and the Minister of Energy. So exploration licenses will be renewed. You’d be well aware that we’ve got rigs of our growth clearing going on three prospects and the one will be looking I believe are very exciting period in the exploration sense in Q1 and Q2 next year. So we’re on track guys. We’ve got a development. We’ve got a good solid financial stable company and we’ve got a lot of exploration upside.

Some of team sitting around this table are looking very tired, but on top that we’re really, really very excited. It’s going to be in a company like this and the future is really now coming into focus. And of course top of that I’ve got a very good partner in the form of Total, very, very happy to have Total on board and I think that’s going to be, I think, the catalyst for the transformation and the vision of where we’re going to take this company, which will be a bigger, better real LNG oil and gas company. That’s it.

Wayne W. Andrews

Great. Thank you very much, Michael. And I’ll be available to take some questions today. I’ll try to reach you all who have questions. Thanks for your time and participation.

Michael Hession

Thank you everybody.

Operator

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

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