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  • getitrt2 getitrt2 Nov 21, 2012 12:36 PM Flag

    Cabinet Formalizes Project Approval-RJ

    Cabinet Formalizes Project Approval, Including Partial Gas Sale to Gov't
    ♦On yesterday’s 3Q earnings call, InterOil management noted that PNG Prime Minister
    O’Neill has verbally approved the LNG project, though there was still the formality of
    approval by the full cabinet. That final box has been checked: cabinet approval is now
    ♦The cabinet has approved a 3.8 million ton per annum (mtpa) LNG plant in the Gulf
    Province as well as a 27.5% sale of the Elk/Antelope gas resource to the state (the latter
    first revealed in a Wall Street Journal article from October). The terms of this sale have yet
    to be negotiated between the two sides. The cabinet committee that will handle the
    negotiations on behalf of the government is instructed to report back to the full cabinet by
    November 30.
    ♦As we observed in yesterday’s earnings comment, starting out with a smaller LNG plant has
    always been InterOil’s strong preference, given the accelerated timeline, comparative ease
    of financing, and (most recently) more competitive bids from potential partners. It was the
    O’Neill administration that had previously insisted on a larger “world-scale” project in the
    8-10 mtpa range. The cabinet’s approval of the 3.8 mtpa project means that InterOil
    effectively won this argument (though, of course, the company would have complied with
    the politicians’ wishes if they insisted on the larger project).
    ♦With final cabinet approval in hand, the path is clear for InterOil to conclude its
    negotiations with prospective strategic partners about a resource selldown (which, to be
    clear, will be in addition to the gas sale to the government). Today’s press release stated
    that the long-awaited partnership announcement will come “in the coming weeks” – an
    intentionally vague timetable. InterOil has clearly learned its lesson not to self-impose
    deadlines over which the company has no unilateral control. To be clear, the company has
    not promised that the partnership will be announced by the end of 2012. However, much
    as some investors want to hear that promise, the reality is that setting artificial timetables
    for delicate, detailed partnership negotiations is not a wise thing to do. We think a deal by
    year-end is a plausible scenario, but we have never tried to forecast precise timing in
    relation to InterOil’s business development, and we don’t intend to start doing so now.
    ♦Finally, we want to again address investor concerns about the gas sale to the government,
    as we previously did on October 17 (“Resource Selldown to the Govermment: Addressing
    the Market Myths”). Similar to analogous domestic gas reservation policies elsewhere,
    including Western Australia, this is not an expropriation: it is a transaction done on a
    willing buyer / willing seller basis. Based on our discussions with management, our
    interpretation of the phrase “commercial market terms” used in InterOil’s press release
    indicates that the resource valuation used by the government would broadly mirror the
    terms of InterOil’s selldown to the strategic partner. For example, once InterOil agrees to
    sell gas to a partner at a particular value per Mcf, the government should pay a
    comparable amount. This does not mean that InterOil will necessarily get a large check
    from the government on day one – other financing arrangements, such as tax abatement,
    can also be made – but the overall economic value is market-based.

    Sentiment: Strong Buy

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