Sydney Morning Article from this morning The obscurely named...

Sydney Morning Article from this morning


The obscurely named "contingent value right" has emerged at the centre of the debate around the value of Oil Search's multibillion takeover offer for fellow Papua New Guinea gas player InterOil, with some brokers estimating it could take the full price close to $US60 a share or more.
Designed to allow shareholders in InterOil to benefit if the company's Elk-Antelope gas field turns out to be on the large side, the CVR will have a cash value if the field is bigger than 6.2 trillion cubic feet.
But InterOil shareholders, who need to give two-thirds approval for the deal to go through, will have to vote on the Oil Search offer months before they know how much the CVR will pay out.
It will add $US6.05 ($8.41) to the offer price for every trillion cubic feet of gas found to be in the field above 6.2 tcf, supplementing thee $US40.25 per share value of the scrip part of the deal, to be paid in Oil Search shares.
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Analysts assessing the Oil Search offer are placing a different value on the CVR depending on how optimistic they are about Elk-Antelope where drilling has yet to be completed. The field will only be independently certified in the first half of 2017, so only then will the value of the CVR become clear.
Message boards on InterOil stock are jammed with rumblings from small shareholders, many of whom bought InterOil stock at much higher prices, angry about the value they are being offered and the payments worth tens of millions of dollars to be paid to managing director Mike Hession.
Some small shareholders say they will be satisfied with the value of Oil Search's offer only if Elk-Antelope is shown to hold 10 tcf of gas, a volume that would make the CVR worth almost $US23.
Bernstein Research analyst Neil Beveridge said the drilling of the Antelope-7 well, which has just been approved, has the potential to add one trillion cubic feet to the resource base at the field. He is assuming the field already holds 6.5 tcf of gas, and puts a 50 per cent chance on Antelope-7 coming up with another 2 tcf.
A field of 7.5 tcf would add $US7.90 in cash to the scrip part of the deal, which comprises 8.05 Oil Search shares per InterOil share and was worth $US2.2 billion when it was announced.
Meanwhile, Raymond James, a broker close to retail holders, based its calculation on the end-2015 estimate of Elk-Antelope by GLJ Petroleum Consultants of 10.2 TCF of gas, implying a cash payment of $US24.20 for the CVR.
That would made the total deal worth double the closing price of InterOil before the deal was announced last Friday, the broker noted.
Under Oil Search's side-deal with Total, the French oil major will pay 60 per cent of the cost of the CVR in the event Elk-Antelope is bigger than 6.5 tcf.
But former InterOil chief executive Phil Mulacek has criticised the structure of the CVR, which he says should include a separate component that is paid out to InterOil shareholders two years after production starts from the Papua LNG venture to be fed by the Elk-Antelope gas resource. Only then will it become clear from the performance of the field, how much gas it holds, he says.
While some small shareholders agree, based on their comments in online forums, others don't want to wait that long, given production from Papua LNG may only start in 2022-23. Retail holders are understood to represent about 25 per cent of the register.
Mr Mulacek has harshly criticised the InterOil board for agreeing to the terms of the deal, which he says seriously undervalues InterOil. He says he is supported by several large shareholders. However a source close to InterOil say institutional holders have shown no open hostility to the deal and are pleased to see the upside offered under the CVR structure.
The deal needs two-thirds shareholder approval to be passed, at a vote expected to be held in July. However before that time, the InterOil board will face a test of support at the annual meeting on June 14 in New York, where Mr Mulacek has put forward proposals that, if successful, would see in a completely new board, inevitably throwing serious doubt around the deal.