Contributor since: 2012
If you reread my articles, you'll notice that I have acknowledged in several instances that Phil has been an obstruction to maximizing shareholder value, so your allegation is disingenuous (i.e. "The recent shuffle of InterOil's Board of Directors with the replacement of Phil Mulacek for Gaylen Byker may signal an increased willingness to consider any options that are accretive to shareholder value, so a Shell bid for the entire company at a high enough price could potentially be accepted.").
I am exceedingly confident that a deal which is significantly accretive to shareholder value will be announced shortly. The evidence of significant bidding activity among majors and of InterOil's expectation that it will be sufficiently capitalized to aggressively expand its drilling program following the transaction is overwhelming.
You either missed or, more likely, decided to blatantly ignore this statement:
"InterOil chief financial officer Collin Visaggio confirmed to that Mulacek’s retirement was a part of the process to bring in a strategic partner to operate the Elk-Antelope field."
The implications are that a partner (or multiple partners) has been selected and Mulacek's resignation was a precondition for consummation of the transaction. I have heard about of several instances over the past few years in which companies in the industry developed a strong aversion to Phil and were unwilling to consider working with him despite being intrigued by InterOil's assets, so it's not surprising that his resignation was a precondition for closure.
Phil's decision to remain on the Board and continue to have the same restrictions in transacting his stock that he had as the company's CEO speaks volumes. He had an opportunity to escape and detach himself completely from InterOil, but he chose to maintain a greatly diminished role and consequentially will continue to file form 4's for any transactions that he conducts as long as he remains on the Board.
I frequently reference quotes or reports of conversations in PNG Industry News, not unsubstantiated rumors with no accompanying sources. Even if the rumors reported in last night's article were accurate, the implications are unclear.
In contrasting InterOil with the "many many energy companies out there that have been clobbered and are trading at massive discounts to their asset base, but are much lower risk", my analyses indicate that most of the energy group remains slightly overvalued as FCF estimates for the companies over the next several years are too high if their reserve growth trajectory were to accelerate to positive low to mid single digits.
InterOil has a world class resource that bears many similarities to Ghana's Jubilee oil field, which XOM, CNOOC and BP were embroiled in a bidding war for a stake in several years ago at a >$20 billion valuation. The point isn't that the molecules, size or time to market were exactly alike, but rather that the majors suddenly latched onto the previously unrecognized world class discovery and bid the asset up to much higher valuations than the market ever previously contemplated. Of course, Ghana ultimately thwarted the bidding activity while PNG seems to be doing everything possible to attract a major operator for InterOil, but the point is that when low-cost world class hydrocarbon assets are discovered and the majors become engaged, the bidding activity typically results in tremendous and instant value creation.
InterOil is the global low cost producer with a confirmed string of pearls in the context of an LNG industry that is characterized by Australian capacity being shelved at an unprecedented rate, Qatar's growth having become stagnant, East Africa being >10 years out according to experts with whom I speak, and adequate new capacity to meet demand predicated on hopes that US and Canadian export projects will be approved quickly enough. Meanwhile, natural gas supplies only 4% of China's power needs and Japan's nuclear capacity will be shuttered indefinitely, so the appetite for LNG is insatiable at the right price. As the global low cost producer, InterOil's (or whomever acquires or partners with it) drilling activity is about to accelerate dramatically and the Gulf of Papua may very well fill in the gap being created by the reduction in Australian capacity growth. InterOil trades at a much more massive discount to its asset base than any energy stock that I've encountered, and I don't believe there's any risk to its Gulf Project being commercialized.
PNG Industry News revealed in its 4/15 article titled "More than one bidder in play: InterOil" that "The CFO also clarified that the PNG government was “involved in the process to conclude negotiations and achieve FID [final investment decision]”, implying that since 2/28 the government has been working with InterOil and its prospective partners to finalize development plans and attain a revised project agreement. Though the government's involvement may have been responsible for a slightly longer bid selection process, it mitigates the risk of political obstacles to FID and major contingencies to closure of a binding deal.
James, with all due respect, you have no clue about the complexity of these proposals and the number of permutations that must be evaluated (i.e. cash upfront, price, project structure, control, protection against cost overruns, etc...), you have no clue whether a bidding war has emerged through which the value of the resource has escalated further since 2/28 (I believe this to be likely), and I'm confident that your false premises and utterly incorrect conclusion will soon be evident.
Josh, with all due respect, your analysis is fraught with error and your inability to respond to indoreservoir and others' counterpoints in this thread simply confirms your lack of relevant knowledge. I know two "brilliant" multi-billion dollar hedge fund investors with tremendous track records and reputations who have been accumulating InterOil for the first time ever since the company confirmed its receipt of "several" binding bids three weeks ago, but in the end the fundamentals will determine the stock's value, not the battle between brilliant investors. I'm guessing that your "brilliant investor" would prefer to remain anonymous rather than be associated with such a blatantly misleading and incorrect analysis anyway.
I do want to thank you, however, for strengthening the bull case on IOC by further demonstrating the lack of substance on the other side. Even this thread following your article is an embarrassment to the short case. Adam Gefvert, for example, wrote, "Oil Search is much different than InterOil. It's (note to Adam: it should be "its" not "it's) reserves are in a different section of PNG, where there actually is commercialized gas." Little does Adam know that PNG LNG is not scheduled to start up until next year, so while there are substantial "proven" gas reserves in the highlands, none of the gas with the exception of ~100bcf (in aggregate) used in the Hides Gas to Electricity Project from 1991 to today is being commercialized just yet.
Adam, when you're dealing with an LNG project and billions of dollars of CAPX, it's all about confirming an adequate resource to underpin a project in order to convert it from "stranded" to economical and valuable. What's changed in 5 years? Antelope, the first onshore reef in the Gulf area ever to be discovered, was intersected, 4 wells were drilled across the reef to confirm its continuity, and 10 tcfe of gas was certified, more than enough to underpin a 2 mtpa plant. As importantly, the majors finally caught on to the reefal trend in the Gulf and have recently become very interested in committing capital to the region.
What were Cove's proved reserves? It was acquired for well over $1 billion. Not only was Cove lacking proved reserves, but also it didn't even have certified resources! Attaining FID and moving resources to proved reserves is more difficult if the monetization is through LNG conversion with a new plant relative to piping the gas, but it's very nearby for InterOil. That's why the US and Canadian exchange companies you're citing attain proved reserves much more rapidly - it's used almost exclusively to pipe to existing infrastructure. It's really not apples to apples. Look at companies like CIE with negative cash flow and an $11 billion valuation or OSH, which had its gas reserves in the resources category until FID was attained on PNG LNG.
Anyway, hope this helps. Good luck.
Adam, here are some facts to evaluate - the AGL/Nippon transaction was announced in December 2008, after the collapse of the financial markets, things have improved materially since then, LNG prices have risen (even while Henry Hub prices have struggled!), InterOil has confirmed the continuity of its 10 tcfe reservoir, majors have become very interested in the Gulf region and in IOC's project, and binding bids have been received. The gas is about to move from stranded 2C resources to 1P reserves upon bringing on a partner and attaining FID this year. PNG's PM Peter O'Neill is meeting with Japanese PM Abe this week and with the PM of Thailand next week, a sign of how important the country's resources have become for the Asia Pacific region.
Oil Search trades at 3X the valuation of IOC with less BOE equivalent resources (ex-Triceratops), much higher F&D costs, inferior exploration acreage, and a much smaller portion of its LNG project than IOC has in the Gulf Project. I'm more optimistic on IOC now than ever, and I think that it's about to break out of its multi-year range and move towards $150-$200 in the next month or two if it isn't acquired first.
Adam, thanks for that unhelpful link to varying natural gas prices from 1.5 years ago. You should focus your analysis (or lack thereof) on the Japanese, Korean and Chinese LNG import markets. Such prices have skyrocketed to close to all-time highs and have been 4-5X Henry Hub. Just look at the PNG LNG offtake customers.
"The report showed one deal in 2008 where AGL Energy sold its PNG upstream interests at $1.54/mcfe. The 2008 transaction was considerably higher because natural gas had reached a peak in mid-2008. Natural gas is worth about a third today of what it was worth in mid-2008."
Do you expect IOC to sell its gas to the US? Most of us anticipate that the offtake will be consumed by Asia, in which case prices are now essentially at all time highs. GS expects LNG prices to average $16.90 in 2013, slightly higher than Henry Hub prices.
Applying your logic using relevant LNG prices, IOC will garner a significant premium to the AGL PNG transaction. I think you're smart enough to know that the relevant natural gas price for IOC is not henry Hub, so I guess I'll chalk the error up to intentional deceit. Either way, it's nice to know that the lack of IOC's proven reserves and CBM transaction values comprise the remaining bear case. Both will be resolved very soon.
Though most of your points are misguided simply as a function of ignorance and are not even worth addressing given the proximity of IOC's resources being transferred to proven reserves and its world class asset being transacted at what I estimate will be a significantly higher value than the almost completely unrelated comps you reference, I'm glad you wrote this article because it will give readers an opportunity to read the dialogue between Indoreservoir and Bonk following this article -
This dialogue will really be an eye opener and a critical educational experience for guys like you. For example, here's the latest back and forth on the comps you referenced:
Here’s another list of separate deals put out by JP Morgan:
(Indo – I’ve annotated your list for ease of reference.)
1. 2010 RD Shell Arrow Energy Corp Arrow Australia: 0.47 CBM
2. 2010 TOTAL Santos / Petronas Asset Gladstone: 0.42 CBM
3. 2010 TOTAL Santos Asset Gladstone: 0.41 CBM
4. 2010 ENRG Inpex Asset Abadi: 0.09 FLNG not arms length
5. 2011 Sinopec Origin / COP Asset AP LNG: 0.66 CBM
6. 2011 Santos Eastern Star Corp Asset Gladstone: 0.48 CBM
7. 2011 TOTAL Novatek Asset Yamal: 0.12 Russia
8. 2011 Sinopec Origin / COP Asset AP LNG: 0.66 CBM
9. 2011 RD Shell Inpex / JOGMEC Asset Abadi: 0.25 FLNG
10. 2011 Various * RD Shell Asset Prelude: 0.34 FLNG
11. 2012 MIMI ** Woodside Asset Browse: 0.76 $40 billion project cost estimate; no FID
“Others have noted some higher transactions like PNG LNG but that is a “post deal” in-flight project so I doubt an SM is going to pay up for value the bring to the table.”
Indo: I don’t know what you mean by ‘post deal’ in-flight project – but my ignorance shows.
I have not checked the numbers but I expect a lot of slop by JP Morgan (look how bad the ‘London Analysts’ missed it above) but lets just look at whether we’ve even got a proper sample. Lets see if we’re comparing apples and oranges and look at those 11 sales above.
Six of them are CBM based, and two of them are FLNG, and one of them was basically a forced sale (Abadi by Inpex to ENRG - Bakrie).
So are these relevant comparisons, or would a buyer put additional risk on unproven CBM and hugely expensive Queensland LNG projects? Ditto with unproven FLNG technology? I think the answer to those questions is yes, substantial additional risks and costs on these compared to the conventional reservoir and LNG project proposed by IOC. Only my opinion, however.
And on to Novatek/Yamal – mother Russia. Talk about PNG being corrupt, just ask BP or the Shtokman partners how Russia treats foreign investors. Not even comparable to IOC/PNG. And I see Total is now delaying an FID on the LNG project (Upstream – 23 Oct 2012). Maybe having second thoughts about the political landscape, you reckon?
And that leaves Woodside Browse, a $40 billion dollar yet to be approved LNG project (maybe FID in 2013 – FID date and project cost in Upstream, 24 Jan 2013) and then we’ll see how that $40 billion price tag holds! And here again, I’d like to see how MIMI’s purchase price was calculated.
So, overall I cannot see how any of the 11 projects compare to IOCs other than they’re gas transactions linked to LNG. Overall you’ve presented an apples to oranges comparison which is not entirely relevant. IMHO
“I also note that producing E&Ps trade in the 4-6x cash flow range, so IOC is trading like a company doing $800M to $1B in operating cash flow today – but cash flow is years away even with a “deal” so whatever the ultimate CFs will be will have to be enormous to DCF out to the current market cap.”
Indo – how do any exploration companies exist then? Look at Cove before the buyout, for example, with its $1.5 billion market cap and NO cash flow. Its an exploration company with a development project on-tap a long way off – maybe the valuation is too high, I dunno, but comparing it to producing E&Ps is incorrect as Resourcearb has already pointed out.
Bonkthegrups, on the following comment:
"I also note that producing E&Ps trade in the 4-6x cash flow range, so IOC is trading like a company doing $800M to $1B in operating cash flow today – but cash flow is years away even with a “deal” so whatever the ultimate CFs will be will have to be enormous to DCF out to the current market cap."
I'd caution you that not all E&P companies are the same. Cobalt International Energy (CIE) for example, has a $10.4 billion market cap, and GS expects -$244mn in EBIT this year, -$205mn next year, and $159mn in 2015.
Meanwhile Shell (RDS.A) trades at 4.8X CF but only a 2.1% FCF yield on 2015 estimates! They're plunging money back into reserve replacement as their reserves rapidly deplete and such replacement is becoming much more expensive. This has been a consistent theme among the E&P space, especially for the majors you're referencing.
Hence when companies like InterOil can spend well less than $1bn to add 1.5 billion BOE of low cost natural gas and condensate reserves, they get ascribed significant premiums. It's hard to find any E&P company with F&D costs as low as IOC's. I expect that IOC will have a market cap of well over $10bn in the not too distant future.
Yes, it's the first time that I can recall such specific visibility provided by the company. The criticism of management stringing along investors by alluding to a deal happening "soon" is completely obliterated by this release. If the company didn't know unequivocally that it would have fair bids from world class partners by February 28th, management never would have issued this release.
The story is finally coming to a head, and the reality that this project will garner FID and move ahead is about to set in. As it does, investors will start to predicate the share price on a calculated NAV, which I estimate is over 300% higher than the current share price.
Look at Cheniere (LNG) as a template for what to expect in the coming weeks.
You didn't include the remainder of the $70 million payment due from PRE for Triceratops and $26 million for the balance of PPL237 in your analysis.
Also, while many of the comments on this board express pessimism based on the prolonged sell-down process, there have been several independent confirmations of bids having recently been submitted by majors for the resource.
Better check your premises. The company just attained a $100 million credit line and a significant payment is due from PRE upon their being added to the Petroleum License. IOC is flush with liquidity.
"Haven't we read this all before?"
Nope, I haven't read anything like the following passage before. Have you? The market has completely missed how beneficial the substance of the NEC submission is for InterOil.
Very importantly, given that the government is taking its 22.5% of the resource in kind for domestic use, InterOil will control 100% of the Gulf Project's first train, which is the Project's most valuable segment and the component which majors are obviously most interested in buying into. Hence, the government structured its agreement with InterOil such that the highest NAV segment of the Project is 100% retained by the company and its commercial partners, providing almost indisputable evidence that PNG has no intention of arbitraging InterOil's gas or leaving the company with inferior economics. In fact, contradictorily, the approved structure provides unequivocal evidence that the government is seeking to facilitate InterOil's sell-down at the optimal price and to expedite the Project's Final Investment Decision (FID). A closer inspection of the new deal structure with the government will lead market participants to recognize that InterOil's economics have been enhanced with its increased ownership of the first train and correspondingly, that the stock price should have soared post NEC approval.
"Why do you keep using the word "imminent" in your headlines, especially after your last "imminent" deal never happened?"
In retrospect, my projections on timing were admittedly too optimistic, but significant value creation has occurred in the meantime. There were several events that needed to occur in order to derisk the project and enable InterOil to attain full value for its resource. The most important event was NEC approval, but confirming the reservoir continuity at Antelope-3 was also important. With these events now behind InterOil and several bids from majors on the table (independently confirmed and reported), I believe that a deal is now imminent.
I also believe that there will be at least one takeover attempt in the very near-future, as 15+ Tcf of gas and condensates in two productive reefal structures with the high potential for a string of pearls across the acreage in close proximity to Asia is too unique and valuable for majors to easily pass up.
This is the quote from last month's article... It's a subscription service, so in order to confirm this quote, type "interoil shell" into the search bar on the upstreamonline website.
"The Canadian company has received up to six offers. Shell is understood to be one, Chevron is another. National oil companies are also in the mix"
The Rovuma resource estimates that you are referencing are not certified resources; they are estimates established by the companies that have an interest in the reservoir. Also, just as the market seems to be ascribing minimal value to Triceratops as a result of the lack of a project agreement on the respective PRL, the Rovuma development plans are much more nascent than those of the Gulf Project. There is no project agreement for Rovuma, significant environmental risk, and as the article in today's FT indicates (, the development risks in East Africa are generally very significant.
I am very surprised that Shell hasn't yet attempted to buy InterOil, but I suspect that NEC approval will be the catalyst for its doing so. Meanwhile, multiple recent confirmations of bids having been submitted by majors for the resource is a very encouraging sign. In fact, a recent article in upstreamonline indicates that Shell has submitted a bid for Elk/Antelope. The market doesn't seem to be paying attention...
As referenced by the company, accretive bids have been received by prospective partners who have obviously accessed the data room in order to justify bidding. The only reason that Shell would not have been granted access to the data room is if it weren't willing to sign a nondisclosure agreement, and the logical reason for which it would resist signing such an agreement is that it wanted to retain the flexibility to bid for InterOil (in a hostile manner) with the government's support. Unfortunately for Shell, the current administration stands firmly behind InterOil, and it looks like Shell is now trying to extend an olive branch and pursue a friendly combination.
Another laughable negative article on IOC. The incidence of inaccuracies is scary. The author discusses the stock's having gone up 20 points primarily on Shell speculation (when in fact it's been up primarily on the new administration and Duma's positive stance), he talks about low porosity fractured limestone (when in fact Antelope has exceedingly high matrix porosity and dolomite, and Triceratops has consistent dolomite incidence; also, unlike others structures in the Eastern Papuan Basin, Antelope is a reef and Triceratops is likely a significant reefal structure as well!), etc... Uninformed arguments like these make me much more confident than ever in the long thesis. It's amazing how anyone could take such arbitrary and irrelevant comparisons seriously. The company has conforming and nonconforming accretive bids (accretive means the value exceeds IOC's market cap) on the table and NEC approval could be imminent. Obviously, many prospective partners have been in the data room and have consequently bid for the resource. The writing is on the wall... the most positive and powerful administration in the history of PNG led by PM O'Neill, the DPE taking a benign stance, a series of reefs with matrix porosity, dolomite incidence, and among the most prolific flow rates in the world, and an Asian LNG market that has an insatiable appetite for LNG. I believe the stock is worth >$400 per share, or $2 per mcf on net 10 tcf of gas and condensate resources. The true value of the resource, however, is much greater than this based on a DCF or NAV analysis with F&D costs well below $1 per mcf and all-in costs that are well less than $10 per mcf lower than Woods Mackenzie's projection for all-in costs associated with the Gulf Project and 7-10 mtpa.