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Investor with extensive analytical and portfolio management experience and a focus on discovering and exploiting differentiated ideas with significant dislocations and clear catalytic paths.
  • InterOil: The Final Chapter 12 comments
    Jan 28, 2013 5:52 AM | about stocks: IOC

    InterOil (NYSE:IOC) announced last week that the "final binding bid solicitation period for the partnering process currently being undertaken will close on February 28", uncharacteristically transparent guidance for the company. Though the market construed the release positively, the implications could be much more significant than investors are contemplating for the following reasons:

    1. InterOil must have considerable clarity and optimism on the outcome of the bidding process, as its latest release leaves little room for a deferral of the sell-down. InterOil has always been vilified for its vague commentary, unwillingness to provide specific targets, and excuses for pushing out timelines. The specificity of last week's press release implies that InterOil strongly believes it will be able to report the selection of an accretive binding bid in the first half of March. After prolonged discussions with many prospective partners, their continued involvement in the bidding process bodes very well for InterOil shareholders. As CEO Phil Mulacek indicated, "The interest demonstrated by major oil, national oil and global utility companies remains strong, and bodes well for the conclusion of our sell down of interest in the Elk and Antelope fields and partnering in the Gulf LNG Project".

    2. The bids that are due prior to February 28 are binding, and hence InterOil's selection of the winning bid will be the final substantive step required for closure. Though the company previously acknowledged that it had received bids for its Project, there was no indication that these bids were binding; hence unlike the bids that are due by February 28, the previous bids may have been subject to further negotiation, resulting in a prolonged deal process. InterOil's three investment banks would not have furnished prospective partners with a firm date by which binding bids must be submitted unless they were certain that the interest would support a positive outcome.

    3. The PNG government is supportive of InterOil's project. In its press release, InterOil stated, "We are pleased to have the continued support of the PNG Government during the conclusion of our partnering process". Perplexingly, InterOil's stock is still trading 20 points below its price at the time of the initial WSJ leak on the structure of the NEC agreement. Reports that the government may take its 22.5% of the resource in kind for domestic use indicates that InterOil could 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. Unfortunately there aren't active sell-side analysts to highlight this point, but the resulting dislocation will dissipate with the announcement of a deal in the next 45 days.

    The most relevant recent LNG transaction was arguably Marubeni's acquisition of a 1% stake in the PNG LNG project through its purchase of a 20% stake in Merlin Petroleum for $297.96 million in November of 2011. The stake equates to ~$3 per mcf of reserves, or in excess of 5X InterOil's market cap assuming no additional resource upgrade from the successful drilling of Triceratops-2 and Antelope-3 last year.

    InterOil's short interest has been consistently appreciating towards an all-time high, and it's now 11.48 million shares, >23% of its outstanding shares. With the company having one of the best projects and lowest cost natural gas resources in the world in close proximity to Asia's largest import markets, LNG prices at their highest levels ever and surging LNG demand, majors' cash balances at unprecedented and bloated levels, PNG undergoing a period of unprecedented stability and economic prosperity, and significant risks developing in the global LNG supply picture, there has never been a more compelling time for InterOil to close its sell-down and maximize the value attained for its resource.

    The majors recognize the risk of a significant deficit emerging in the LNG market, as production estimates from regions like East Africa, Australia and the US are increasingly at risk. According to a Bloomberg article published on Friday, for example, "The U.S. may export 50 metric million tons a year of LNG by the end of the decade, or about 10 percent of the projected world market, [Royal Dutch Shell CEO Peter] Voser said today in a Bloomberg TV interview in Davos, Switzerland. That's below the 120 million tons a year he said is predicted by some forecasters and less than Qatar's current annual production of 77 million tons." According to another recent article, "A strong ongoing environmental protest movement in New South Wales and Queensland against coal seam gas (NYSE:CSG) projects is threatening to cripple the development of Australia's liquefied natural gas (NYSEMKT:LNG) industry".

    As this Oxford Business Group Review highlights, PNG has been increasingly attracting the majors' attention as a result of its unprecedented political stability, world class unexploited resources, and proximity to Asia. The $19 billion Exxon (NYSE:XOM)-led PNG LNG Project is coming online next year and is expected to generate $6.2 billion per year in revenue for the government for the next 28 years; Shell (NYSE:RDS.A) recently reentered the country and expressed interest in building a hydrocarbon resource; Total (NYSE:TOT) just struck a JV with Oil Search to explore for prospects in the Gulf region, which is where InterOil's acreage lies; Last May, the PNG National reported that "Chevron Niugini (NYSE:CVX), one of the United States' petroleum and gas giants, is returning to PNG to partner with InterOil to develop the second Gulf LNG project, Treasury minister Don Pomb Polye has revealed… He said he met with the representatives of Chevron Niugini yesterday who were here to look at the InterOil Gulf LNG project".

    The only remaining short case may revolve around the cynic's arbitrary expectation that a deal may involve little upfront cash or that the price will disappoint investors. Given how excessively capitalized the majors' balance sheets are at this juncture, however, it seems probable that the transaction will contain a significant upfront cash component. The most important point that the cynics have not yet grasped is that irrespective of the size of the cash component, the consummation of this deal will result in an imminent FID and a bankable resource. The stock's valuation will be increasingly predicated on the NAV of the resource, which I estimate is well in excess of 4X the current market value of the company. The company's cost of capital will be significantly reduced, liquidity will be plentiful, and the NPV of the aggregate payment to InterOil will establish a much more realistic benchmark by which the stock market will establish a worst case valuation for the stock. With InterOil's stock trading at less than $0.40 per mcf on my estimated year-end 2013 resource estimate and with confirmed interest in InterOil's project by majors, national oil companies and global utilities, it will take a miracle for the short thesis not to be obliterated in the coming weeks.

    Disclosure: I am long IOC.

    Themes: LNG Stocks: IOC
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Comments (12)
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  • bonkthegrups
    , contributor
    Comments (245) | Send Message
     
    Well, if the company states that bids are due, it's pretty much case closed. Just like these times:

     

    #1 "We are in discussions, a vast number of companies on at least 3 continents have expressed interest joining our acreage following the Elk-1 discovery and flow test." - Phil Mulacek, Apr 4, 2007

     

    #2 "00:49:22 Prior to this well we started a selldown with strategic partners, whether that's japan, china, and we had a phenomenal amount of interest.
    00:49:30 So we put that on hold until after this well because we can't price the value until we understand the oil and the condensate. " Phil - Fast Money Transcript- Oct 2009

     

    #3 "we have lawyers and transaction teams working around the clock on every continent to ensure the valuable LNG transaction for all partners is secured....we're all on track to reach our transaction goals by the end of this year." - Phil - CC - Nov 2011

     

    #4 "As mentioned earlier, we're still working on final transactions in the $5 to $7 per Mcf range, which really puts in light the differences between where we stand today." - Phil - Nov 2011

     

    #5 "We are working with our advisors to finalize a strategic LNG partner, which will enhance the overall process and value for our shareholders, all of them which are accretive. This was further accelerated after the announcement of the Pacific Rubiales farm-in transaction. This helped to establish pricing benchmarks, improved our commitment to the sell-down process to the overall bidders. After this announcement, we saw significant heightened bidding by the bidders." - Phil Mulacek, May 14, 2012

     

    #6 "As stated before, we are now set to engage with a short list of significant industry participants in a view of concluding these discussions and entering into agreement this quarter." - Phil Mulacek, May 14, 2012

     

    #7 "Regarding conforming and non-conforming bids, some visit the government first. Others say they bid and they'll follow up after the final short list process, which we just reviewed with the Board of Directors this weekend and just completed with the advisors. So that process is underway." PM - May 2012

     

    #8 "On the LNG front during the quarter, we continued to have a number of approaches for more LNG off-takes by LNG consumers and LNG partnering proposals through the investment banks. Most bidders are in the final stages of due diligence, and we see the culmination of these bids during the second quarter of this year." PM - March 2012

     

    #9 "The PNG constitutional confusion did slow the process down over the last few months, but we saw the paralysis free up and the government sectors are now focusing on the Gulf LNG project. The Prime Minister reconfirmed his FID goal for the Gulf LNG project, and the PNG government has seen a number of interested" PM - March 2012

     

    #10 ""The company staff are relentlessly working on all required project aspects and parts to close and achieve FID. The sale process is in the final stages of LNG partner selection with selection expected this coming quarter." PM - March 2012

     

    #11 ""People worried about the writs in the election. We've never seen that as a deterrent, in fact of after the writs were issued, we got our NEC project agreement executed when we originally did the refinery. So I just want to put that one to bed that it's not a material on it." - PM March 2012

     

    #12 ""So as we state, we see that we'll be through our bid process this quarter. We think all the timings aligned on the overall project." PM - March 2012
    28 Jan 2013, 09:45 AM Reply Like
  • getitrt2
    , contributor
    Comments (90) | Send Message
     
    All of that was before the issues that arose with the government on the Project Agreement, all of which has since been resolved. All these quotes are irrelevant and misleading. The Company has never been to this point before, with a final deadline in conjunction with the Investment Banks and bidders for final, BINDING bids. The article writer knows what he's talking about.
    28 Jan 2013, 01:15 PM Reply Like
  • bonkthegrups
    , contributor
    Comments (245) | Send Message
     
    "All of that was before the issues that arose with the government on the Project Agreement"

     

    Of course it was before the recent "issues", that is the way time works. The point is there have a been a plethora of other different issues a long the way, each of which has served to delay delay and delay (even a lunatic like "getitrt" can't deny that we are in 2013, or can he?).

     

    "All these quotes are irrelevant and misleading."

     

    Perhaps you should conduct a poll as to what % of Seeking Alpha readers believe verbatim quotes over a 6 year period by a company's CEO on a single topic (the big elusive uberdeal) are either irrelevant or misleading. At a bare minimum the provide an achor to evaluate current and future comments.

     

    "with a final deadline in conjunction with the Investment Banks and bidders for final, BINDING bids"

     

    How do you know? The company ran an investment banking process in 2009 with BNP Paribas and ABN Amro - do you think those i-banks would have used "deadlines"? And here we are 15 months and counting into the second i-banking process with UBS, Morgan Stanley, and Macquarie, and given the CEO's quotes above on this process it certainly implies that "deadlines" were thrown out there.

     

    Just because IOC announces that bids are due at the end of Feb and says they must be "binding", that does not compel anyone to a) show up, or b) put something acceptable on the table.

     

    The 2009 engagement of BNP and ABN Amro is here:

     

    http://bit.ly/Wmlcif

     

    Now explain to the world why it seems to be missing from the 2009 section of IOC's website.

     

    As usual, we wait.
    28 Jan 2013, 01:30 PM Reply Like
  • getitrt2
    , contributor
    Comments (90) | Send Message
     
    Your quotes from previous years ARE irrelevant and misleading with respect to the status of the current bidding and selection process, a status unlike anytime prevously, but that is par for the course for a short criminal.

     

    I submit the following from a professional and highly knowledgeable energy analyst:

     

    "InterOil Corp. January 24, 2013
    (IOC:NYSE) Company Brief
    Pavel Molchanov, Raymond James
    Exploration and Production ______________________...

     

    Decision Time: LNG Partnership Talks to Conclude Within Five Weeks

     

    ♦ In our InterOil brief on December 4, we underscored that year-end did not represent a deadline of any kind for the long-awaited LNG project partnership / resource selldown announcement. In fact, after getting burned several times in the past by setting (and then missing) self-imposed deadlines for business development milestones, this time around InterOil itself has stayed away from promising any specific timeframe for getting a deal done. But that changed today, as the company publicly disclosed a precise timetable for wrapping up the partnership talks.

     

    ♦ February 28 – exactly five weeks from today – is the date on which the final binding bids are due from all the prospective partners. Let’s make it clear what this means. Late last year, management stated that bids have been received from at least four interested parties: two major oil companies, one national oil company, and one utility (Kogas, based on its own public comments). Those bids are preliminary, i.e. they could be categorized as letters of intent or term sheets. As is customary in such cases, negotiations have taken place between the sides to refine specific points. Once the final binding bids are submitted,
    InterOil plans to meet with its investment bankers during the first week of March. InterOil’s board will then be able to make a decision on which bid to accept. If the decision is straightforward – one bid is clearly superior to all others – then an announcement can be made very quickly. If the decision is more complicated, then the board’s deliberations would presumably take longer. Either way, once InterOil decides, the winning bid can be converted into a formal contract by signing on the proverbial dotted line.

     

    ♦ One point we have previously made in our research is the risk that InterOil will allow the perfect to be the enemy of the good in these negotiations – in other words, the natural tension between management’s desire to hold out for the best possible deal terms and the equity market’s desire for instant gratification. The fact that the company feels confident enough to self-impose a deadline for concluding the negotiations is encouraging, because it signifies that management is comfortable with what’s already on the table. There obviously remains plenty of market skepticism that the company will deliver a deal. Given this skepticism, short interest has ramped up, and we think the stock is setting up for a
    short squeeze once the partnership announcement comes out."
    28 Jan 2013, 07:34 PM Reply Like
  • bonkthegrups
    , contributor
    Comments (245) | Send Message
     
    "but that is par for the course for a short criminal."

     

    Ironic that you call me a criminal for posting public quotes by IOC's CEO, while posting proprietary and copywritten content owned by Raymond James. While you're at it why don't you post what Pavel wrote in 2009, 2010, 2011, and 2012, or even further back when he worked for current Interoil VP Capital Markets Wayne Andrews.

     

    I'll get you started - here's a nugget from 2 and half years ago:

     

    "As detailed in our upgrade comment on June 22, our Outperform rating reflects our positive stance on InterOil’s long-term cash flow potential and likelihood of near-term catalysts, including our view that one or more strategic LNG partnerships and a final investment decision on the condensate project with Mitsui will be announced by year-end 2010. This is balanced by the substantial operational, cost, and timing risks as the upstream assets, condensate project, and LNG plant are developed over the next five-plus years."

     

    Looking forward to the next "near term catalyst".

     

    "Your quotes from previous years ARE irrelevant and misleading with respect to the status of the current bidding and selection process"

     

    What about the quotes from last year and late 2011 that relate to the CURRENT i-banking process? Actually quotes 3 to 12 above are ALL about the current process. I suppose if your team is losing in the 4th quarter of the Superbowl you'll argue that the first 3 quarters of the game are irrelevent and the guy running the scoreboard is a criminal.

     

    Good entertainment value from the likes of Getitrt2 though. Let's see what else he's got.
    28 Jan 2013, 08:58 PM Reply Like
  • flashgordonovich
    , contributor
    Comments (56) | Send Message
     
    Right. What is unfortunate is the complete lack of independent, reasonably objective analyst reports on IOC. As you mention, not only has Pavel been completely wrong about the company for ears, but he used to work with Wayne Andrews, the now VP of Capital Markets for IOC. And their firm did underwrite a bond offering for IOC some time ago. It seems like the only banks that cover IOC and recommend it, are totally conflicted. It likely explains why they have so wrong about it.
    29 Jan 2013, 01:49 AM Reply Like
  • cynicexcellence
    , contributor
    Comments (252) | Send Message
     
    I am just shocked that the author neglected to use the word "imminent" as he did in each of his last three articles, each of which proved to be completely and utterly inaccurate. If nothing else, the author must be complimented on his perseverance and stick-to-it-tiveness. I just think the author is (as he has in the past) thinking in absolutes, black and whites. Anyhow, the stock is trading lower since the company made the announcement. I advise cynicism, as Bonk suggests.
    28 Jan 2013, 05:06 PM Reply Like
  • getitrt2
    , contributor
    Comments (90) | Send Message
     
    The author's thinking on timing may be open to some interpretation or off some, but at least he is "thinking". You're just plain wrong about what really is "black and white". The stock closed at 55.74 before the Company's announcement, and closed up 5.33 at 61.07 on 1/24 after the announcement, and closed today at 59.58, still up. You can't even get your direction right,cynic. Please listen to bonk and short the stock and suffer the consequences.
    28 Jan 2013, 07:17 PM Reply Like
  • pjd11
    , contributor
    Comments (2) | Send Message
     
    Great analysis - I wish this article got wider release than the Instablog section. I hope the story shows up in the headlines of the various sites.
    29 Jan 2013, 06:57 AM Reply Like
  • crazylikebudfox
    , contributor
    Comments (219) | Send Message
     
    "Given how excessively capitalized the majors' balance sheets are at this juncture, however, it seems probable that the transaction will contain a significant upfront cash component."

     

    This leap of faith puts Creationists mental gymnastics to shame. This is simply rubbish.
    29 Jan 2013, 05:21 PM Reply Like
  • bonkthegrups
    , contributor
    Comments (245) | Send Message
     
    It's funny how Getitrt2 is crtical of people posting well-referenced, verifiable facts and quotes. A guy who starts off a post on IOC with the following:

     

    "Someone at IOC told me recently about talking with someone who told him about a conversation that person had with a person who holds a short position"

     

    So...you talked to a guy who talked to a guy who talked to a guy?

     

    LMAO
    30 Jan 2013, 11:08 AM Reply Like
  • ArtM72
    , contributor
    Comments (60) | Send Message
     
    And while IOC has moved commercialization forward in fits and starts its resource base continues to expand and the infrastructure necessary to move those resources to market continues to be built.

     

    Whether or not the selldown gets announced in early March that gas in the ground continues to get closer to market. If you have some of those 13 million short shares you should be asking yourself if you are going to get out of that burning house you've been playing in before flashover or not.
    31 Jan 2013, 12:07 AM Reply Like
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