interoil in png, page-2

Hi Watford,

I've been following Interoil (IOC) for a couple of years - its what originally made me look at HZN - the IOC ELk and Antelope discoveries.

There's always a lesson to be learned somewhere.

IOC stock fell over 37% on Friday - down to $55.50
http://www.bloomberg.com/news/2013-12-06/total-agrees-to-pay-interoil-up-to-3-6-billion-in-png-lng-deal.html?cmpid=yhoo

IOC still has no reserves (just Contingent Resource) and has been searching for a super major as a partner for a long time now (pushed by PNG Gov't for a variety of reasons). It was supposedly a "stealth" backdoor entry by RDS, then in May this year announced it was holding exclusive talks with XOM and now we have TOT as the partner paying between $1.5B to $3.6B - all of which remains unknown till at least some time in 2015.

IOC keeps 30% of its Elk/Antelope development (PRL15) and says $613M paid on the completion of transaction, (Q1/14), $112M after FID for new LNG plant (not expected until sometime in 2015) and a further $100M after the first LNG cargo. The big variable payment depends on the resource size, estimated at 5.4 - 9 TCF.

TOT says its paying $470M for a 42 percent interest in the PNG gas fields and would pay an additional contingent payment of “approximately” $590M.

So there is quite some ambiguity about the deal because TOT is also looking to farmout a piece of the 61.29% they purchased (or 47.5% if the PNG gov't elects to take up their backin option).


Now it gets a little more interesting. It has been widely discussed that the XOM led PNGLNG JV - which includes Oil Search and Santos - is looking for 3rd party gas - meaning Elk/Antelope field (IOC) - see slide 33 of OSH current Nov presentation.

AND SUPPOSEDLY as reported in the press, TOT wants to farm out a piece of its IOC purchase (19.3% stake apparently).

"Total is in talks to sell that stake to Oil Search Ltd., according to a source who asked not to be named as discussions were ongoing. Total already works in Papua New Guinea with Melbourne, Australia-based Oil Search, from which it bought stakes in three oil blocks in October 2012."


The big questions are whether the (relatively) new CEO (Dr Michael Hession - ex SVP Woodside Petroleum) got a good deal and what if anything this means for HZN.

There has always been a lot of discussion around the Elk/Antelope Resource numbers - which have been independently certified by DLJ:

The latest (2013) GLJ evaluation, numbers used until December 31 2012: (Low Best High numbers)

Initial Recoverable Sales Gas (Tcf): 6.83 9.07 10.85
Initial Recoverable Conden (MMbbls): 111.5 135.4 156.3
Initial Recoverable (MMboe): 1,250.1 1,646.3 1,965.4

Using the "Best Case" numbers, the 1,646.3MMboe is also 9.88 Tcfe (which is how TOT was expressing the deal)

The above is covered in detail in the IOC annual report
http://www.interoil.com/iocfiles/documents/investorrelations/financialreports/2012/IOC_2012_AnnualReport.pdf

IOC also has another gas and liquids field, Triceratops (PPL237) in the early stages of appraisal and sold a 10% stake to Pacific Rubiales in PPL237 license area.



So why did IOC drop so much on what was supposedly "good news"? Possibly the price was much lower than most were expecting??

IOC put out a clarifying release - on the Variable Payments which is here:

http://www.interoil.com/iocfiles/documents/investorrelations/newsandpressreleases/2013/2013-12-06%20PRL39%20Final.pdf

One part of the clarification is that once up to 3 further appraisal wells are drilled by TOT and between 3.5 and 5.4 Tcfe of Resources independently certified (by 2 companies) AND the FID decision is made on LNG, then IOC receives
>3.5 Tcfe and <5.4 Tcfe at a price of US$0.60/mcfe or US$0.77/Mcfe (post Gov't back in) - all paid at FID


At a minimum perhaps the takeaway for HZN is to compare the farmout transaction we did with OG. The "comparison number" for HZN I'll use is the US$5.84 per BOE (pg22 of Jul HZN preso) or US$0.94 per Mcfe. This compares favorably to IOC $0.77/Mcfe - but could just be we have proportionately more condensate. But we also have a much smaller resource (presently).

My high level takeaway comparison is HZN did a good deal with OG and that our CR are more developed than what is at Elk/Antelope.

Will be interesting if anything "happens" with OSH and/or HZN today, especially if OSH take up with TOT and use that gas as 3rd party gas for PNGLNG JV.


How about issuing our PDL please, now that the IOC distraction is out of your hair Mr Duma. Has to be close.