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InterOil (IOC) – Implications of Henry Tax Review

|Includes: InterOil Corporation (IOC)
Natural gas E&P companies in Papua New Guinea received extraordinarily positive news this weekend, as the Australian Government released the final report of the Henry Tax Review under which a Resource Super Profits Tax (RSPT) will be potentially be introduced on July 1, 2012 at a rate of 40% on profits of all non-renewable resources.  Investment decisions on new Australian LNG projects will now likely be delayed, and consequently interest in investing in and securing supply from projects like Liquid Niugini should significantly increase.  Deutsche Bank estimates that projects such as Santos’ GLNG and Origins’s APLNG could suffer up to a 200bp IRR impact from the RSPT, resulting in up to a 40% decline in project NPV.  The significance of this to InterOil is that both Santos and Origin are currently marketing LNG offtake and equity in their projects.  Although InterOil’s low cost production and high LPG and condensate concentrations already made it one of the most profitable projects in the world, the uncertainty introduced by this final Henry Tax Review report will likely linger until legislation in 2012 and cause an increased sense of urgency to secure LNG deals with competing countries like PNG.  This couldn’t have occurred at a more fortuitous time for InterOil, as it’s in the midst of selling a stake in its project to strategic partners.  Australia is expected to supersede Qatar as the world’s top LNG producer by 2020, and the Asian companies who have been considering new Australian project investments and long-term offtake agreements will likely be scrambling to diversify their LNG investment exposure to countries like PNG with stable tax structures and benign fiscal regimes.  Not only should this Henry Tax overhang accelerate the bidding process for InterOil’s project, but also it should enhance the value of its acreage and drilling prospects. 

Disclosure: Long IOC common stock, Long IOC call options