Interoil Corp. Selects Total SA for PNG Gas Development Conference Call
Dec 06, 2013 AM CET
FP.PA - Total SA
Interoil Corp. Selects Total SA for PNG Gas Development Conference Call
Dec 06, 2013 / 03:30PM GMT
==============================
Corporate Participants
==============================
* Wayne Andrews
InterOil Corp - VP - Capital Markets
* Michael Hession
InterOil Corp - CEO
* Collin Visaggio
InterOil Corp - CFO
==============================
Conference Call Participants
==============================
* Evan Calio
Morgan Stanley - Analyst
* Pavel Molchanov
Raymond James & Associates - Analyst
* Chris McDougall
Westlake Securities - Analyst
==============================
Presentation
------------------------------
Operator [1]
------------------------------
Welcome to the InterOil conference call.
(Operator Instructions)
As a reminder, today's conference call is being recorded.
I would now like to turn the conference over to our host, Vice President of Capital Markets for InterOil, Wayne Andrews. Please, go ahead.
------------------------------
Wayne Andrews, InterOil Corp - VP - Capital Markets [2]
------------------------------
Thank you, operator. Hello, everyone.
This is Wayne Andrews, VP of Capital Markets for InterOil Corporation. Before we start, I want to briefly remind everyone that some of the statements made during this conference call constitute forward-looking statements within the meanings of the US Securities laws, including such statements as those regarding expectations of future results, general financial performance, future business prospects and strategies.
These statements are based on Management's current expectations and are subject to a number of risks and uncertainties, which can cause actual results to differ materially from those described in the forward-looking statements. Investors are cautioned not to place undue reliance on these statements. Additional information about factors that could cause our results to differ materially from those in the forward-looking statements can be found in the Company's filings with the US Securities and Exchange Commission and SEDAR.
At this time, I'm going to turn the call over to Dr Michael Hession, who will be conducting the call. Please, go ahead, Michael.
------------------------------
Michael Hession, InterOil Corp - CEO [3]
------------------------------
Thank you very much, ladies and gentlemen.
I'm calling you from Singapore, having just landed from Papua New Guinea, Port Moresby, where earlier on today, we entered into an agreement with Total with respect to Elk-Antelope. I'll talk to you about that in a minute. We've literally just arrived from the airport. We're now going to go through our conference call. We will take questions later on. But I'd like to go through some context first.
As I've talked about and foreshadowed in a number of our discussions, I've been working with InterOil in a tripartite sense. Initially, we worked towards creating stability in the Company. Our next focus was the deal. The deal that we've done with Total today. (technical difficulty) I apologize for that interruption. I'll continue. I will be talking mainly about the deal we've done with Total today and giving some degree of clarification around that deal. I will then talk further about an update with respect to our exploration licenses.
Now, as I said earlier on in the year, it was all about creating stability in the Company. I won't spend too much time on that. We are adequately funded. We're undergoing a cost reduction program. The most significant part of recent history with respect to InterOil is what happened today.
I am very, very, very pleased to tell you that we have delivered on the Elk-Antelope deal. We said early on that we would complete a deal -- sorry, we would execute a deal by the end of the year. Well, today, in the first week of December, we have done exactly that. I would hope that this will create -- (technical difficulty)
------------------------------
Operator [4]
------------------------------
Apologies for that.
------------------------------
Michael Hession, InterOil Corp - CEO [5]
------------------------------
I will continue, yes? A track record of delivery. So, first of all, we've done a deal with Total. What we're going to do within the next couple of hours, for absolute clarity, I gave a guarantee that we'd give the market the ability to value this deal, we will be lodging the sales and purchase agreement on the SEC and on SEDAR; the USA and Canada.
That will be available within about four hours. So it will be lodged today; lodged the same day that we undertook the transaction. With that SPA, you will be able to understand the nuances and, in fact, the exact details of the deal. You will also need to combine that with our latest reserves report from GLJ. Combining the SPA and the latest reserves report will give you a good understanding of the value of this deal.
Now, ladies and gentlemen, there is a range on this deal. I'll talk you through the details of that later in this call. We will also follow-up at the end of this call with a clarification press release and an announcement that today we have received, from Mr Duma, the retention lease for PRL39 Triceratops. The latest news we've received: Triceratops, our first retention lease was awarded back to us today on PRL39. We will also be talking about the Minister of Energy's comments around our renewal of our exploration licenses. So really, there's been a lot of news today; a lot of very good news.
So, first of all, Total. The obvious question is why we choose Total. Well, it was all around the certainty of development. I have always maintained a degree of confidentiality about who the competitors were. I can tell you there was competition right up to the finish line. There was competition right up to the final day. I will not be telling you who the competitors were; but let me say, there were multiple mega-majors in pursuit of this asset.
We chose Total for a number of reasons. Certainty of development; Total are highly incentivized to develop a business in PNG. They gave us assurances that they would be moving forward on this Elk-Antelope development. We saw an enthusiasm and insight to develop this in their team. It's also a simple JV, in the sense that we have got a deal just with Total.
The upside: Total also, within the SPA, have rewarded InterOil for not only potential increases in the discovered resource, but they have also rewarded InterOil for any future gas that we would find in PRL15. So Total brought to the table a reward for growth in the existing reserves and also any future exploration discovered in PRL15. The nature of our agreement is aligned with all the value chain. We have an option to actually bring Total into our exploration acreage. We are very keen to do that, because what we see is further gas discovered, not being stranded. The best way we can see that happening is if we are aligned and incentivized to bring it into this new plan on Elk-Antelope.
Now, the commercial side of things. Yes, Total did put forward the best commercial option. I'm going to talk you through some of the deal metrics. I'm going to talk you through a pricing table. Then I am going to give you some indicative values around some potential volumes. Again, you will be able to pick this apart when you have the SPA, which will be put on, as I said, the SEC platform and the SEDAR platform within hours. First of all, the deal metrics: There's a series of six payments; there's $613 million payable at completion; there's $112 million payable FID; there's $100 million payable at first cargo; and then, very importantly, there is a series of resource payments.
Now, these resource payments, as you would expect, will vary with respect to the resource. We will be undertaking an appraisal program of up to three wells on Elk-Antelope to further define the resource. But what we've got at the moment are three main tranches of payment. I'll go through those tranches. Now, I will be issuing both -- this in a press release immediately after this call in the table. You will be able to see it in the document itself, which has been signed by InterOil and Total.
The tranches is us, 3.5 TCF to 5.4 TCF. InterOil will be rewarded net at $0.77 per Mcfe or pre-government back-in $0.60 per Mcfe. Now, let me just explain the difference there. The PNG government can back in for 22%. So there is a gross number, I've described it to you, and a net number.
So I'll repeat that. Between 3.5 TCF and 5.4 TCF gross will be awarded $0.60 per Mcfe. Post on the back-in, that nets out to, a reward to us, of $0.70 per Mcfe(sic-see press release "$0.77"). The second tranche is between 5.4 Tcfe and 6.5 Tcfe. Gross, i.e., pre-government back-in, we'll be getting $0.80 per Mcfe. That equates net to $1.03/Mcfe. So once the government's been backed-in, you get $1.03/Mcfe.
Now, when we go on to 6.5 Tcfe, anything above 6.5 Tcfe is $1.00 pre-government back-in. Post-government back-in, it is $1.29/Mcfe. Now, it's very, very, very important to understand these numbers are uncapped. I repeat, uncapped. So if we run through to a 10 TCF resource, we will get paid net $1.29/Mcfe. You'll be able to see this in December's purchase agreement, which I said is being lodged at SEC and SEDAR within three hours. We believe these are extremely attractive commercial terms. We're very pleased with what we've delivered today.
Now, I am going to give you some examples, work examples, which again will be in the press release, and can be worked independently when you have the SPA. So, for instance, if the resource is 5.4 Tcfe, we will be rewarded to $1.5 billion. If the resource is 6.5 Tcfe, we will be rewarded $2.1 billion. If the resource is, as per the GLJ certified best case, so the GLJ certified resource that we've undertaken as a Company, which is 9.89 TCF; we will be rewarded to the order of $4.2 billion. Now, there is a high case in the GLJ report of 11.79; we will be rewarded for that, to $5.3 billion. It carries on uncapped. If the thing grows, as I said, everything above 6.5 TCF post-government backed-in will be rewarded by an incremental 1.9 net Mcfe. Again, we think that is very, very, very favorable commercial service. So we're pleased, very, very pleased with the result we got today.
Now, on top of this, as I alluded to; at the signing ceremony today where the Prime Minister announced that winner or the favorite partner -- preferred partner for InterOil was Total, Mr. Duma passed to me the renewal for Triceratops, I discovered, of PRL39. We have that. We now have that lease renewed. The Minister of Energy went on record, backed up by the Prime Minister, that we would be getting our exploration licenses renewed. I will be bringing forth that transcript. We're putting that on our website so people can read that for themselves.
Now, there are other aspects of the deal. I'm well aware as our fiscal is done. There are other aspects of the deal, which I would just like to mention to you. We have a carry on the appraisal program; that is a full carry on the appraisal program for three wells. As I said, three wells, which will allow us to appraise this.
In terms of exploration upside; I talked a little bit about the fact that we would be rewarded at PRL15 for undiscovered gas. We will be rewarded $100 million for every TCF over the first TCF that we discover in PRL15. So, for instance, if we find 10 TCF further, we will get $900 million. If we find 11 TCF, we'll get $1 billion. That will be payable at first cargo of respect to Elk-Antelope development. We will also be carried on an exploration well. We've talked about an exciting exploration prospect in PRL15. We will be carried on that exploration well.
Total has also agreed with us that we will work towards together on other areas outside the Gulf. Now, that is with respect to other parts of our business and potential opportunity in the region outside the Gulf in PNG and possibly outside PNG. So this really is a transformational deal that we've done with Total. It's about value chain alignment. It's about monetizing the gas resource without being restricted and without being capped on good terms. And about working together in the exploration license space.
I would love to think that this is the first of many trains or many developments we would do with Total. That's what stands behind the essence of this deal. That's what stands behind -- and Total said today; and we said today in Port Moresby, the relationship that we have started today. Now, that is the main part of the deal. I'll reemphasize: I said in my last conference call, I would give you absolutely line of site to be able to value this deal; that's why we're putting the SPA lodged on the SEC platform and the SEDAR platform today, within hours of completing the deal.
You will already have the information you need around GLJ. I think that will allow people to work through the nuances of the deal and come up with their own independent evaluations. The worksheets that I have just talked about, I'll actually be issuing after this call, in the form of a press release. I'll also, in the form of the press release, be issuing notification that we've received our Triceratops retention lease.
So with that in mind, I think it's an amazing day for the Company. I am really, really, really excited. I'm really, really pleased that the Management team has been able to deliver on its promise of bringing in a transformational deal before the end of the year.
Now, what we'll do now, is I'll open it to questions.
------------------------------
Operator [6]
------------------------------
Thank you.
------------------------------
Michael Hession, InterOil Corp - CEO [7]
------------------------------
I'll hand over to Wayne, who can put us through to questions. Thank you for your time.
==============================
Questions and Answers
------------------------------
Operator [1]
------------------------------
(Operator Instructions)
Morgan Stanley, Evan Calio.
------------------------------
Evan Calio, Morgan Stanley - Analyst [2]
------------------------------
Congrats on an add to discovery. I look forward to seeing the sales agreement, which sounds better than the initial read on the press release. My first question is, just to be clear, you say you will be rewarded $1.5 billion to $4.2 billion gross consideration based upon the resource range in your progression? Meaning, should we reduce those consideration numbers by the 39% of Total's purchase, which is held by the IPI holders? Or could you explain how they're being treated here? What their rights might be going forward as they have different interests in forward wells?
------------------------------
Michael Hession, InterOil Corp - CEO [3]
------------------------------
I can tell you that the IPI -- this deal will be between InterOil and Total. The IPI holders and any of the holders will no longer be on the license. So what I'm describing to you today is a deal between InterOil and Total. I'll just go back through the numbers there, because I've got the numbers in front of me. As I said, 5.4 TCF is $1.5 billion; 6.5 TCF is $2.1 billion; 9.89 TCF is $4.2 billion; and 11.79 TCF is $5.3 billion. So that's the number clarification. As I said, this is between InterOil and Total. We'll be making a future announcement with respect to the IPI's and any other equity holders in PRL15.
------------------------------
Evan Calio, Morgan Stanley - Analyst [4]
------------------------------
So would you have to make some payment that's within the consideration Total is paying you to clean up the IPI holders?
------------------------------
Michael Hession, InterOil Corp - CEO [5]
------------------------------
Yes. You've got it exactly. Our aim is to actually do effectively a tack-through deal; a value mutual deal with the IPI holders. We have then had some very fruitful discussions in that space. We will be making an announcement about that in the not-too-distant future.
------------------------------
Evan Calio, Morgan Stanley - Analyst [6]
------------------------------
Yes. Okay. Secondly, as you mentioned, the deal is variable based upon resource. There has been various views upon your audited resource estimate over time. Total seems to contemplate the lower end. You even cite a level below your PD-90 estimate in the press release. What -- any comments on the resource or what your views are on that resource? Whether or not GLG will be one of those auditing entities? Or if that's been determined yet?
------------------------------
Michael Hession, InterOil Corp - CEO [7]
------------------------------
Yes, look, I wouldn't draw into Total being focused on the lower end of that. Total have used a number of 5.4 TCF, which, as you know, is the start of the second tranche. It's a range. What Total has done today is they've described part of the deal. You'll be aware that -- Total has factored in a possible sell-down of 19.3%. They've used a number at the start of the first tranche, which is 5.4 TCF, which gets you to $1.5 billion. Therefore, having backed out the sell-down of 19.3%, then they have a net of 32%. So what we've done today is -- Total quite reasonably have described part of the deal, which they think is significant. They've factored in a sell-down. They've really talked about how much this may cost them on one particular point of that first tranche, having to sell-down.
What we're doing is, we're putting the whole deal in front of you; the whole SPA and showing you the whole potential range. Now, that's -- I understand there could be some people who are trying to match what Total is saying and what we're saying. As I said, they've focused very much on one part of the deal, where they think it will go in terms of a sell-down. They've used one particular number at the start of one of the tranches. Let me go to -- I'll give you a fuller description obviously of things like the $100 million to a TCF. I'll give you a fuller description in terms of the carry. I'm trying to give you a complete description -- well, I'm not trying; I am giving you a complete description of the whole transaction. That's why I'm putting the SPA out for everybody to read immediately.
Now, to your question with respect to where do I think this thing is going? I think it's entirely reasonable that we will be in the GLJ range. Yes? But I have also got to say, we are drilling appraisal wells. The fact of the matter is, we're drilling appraisal wells because this thing needs to be further appraised. Now, what we have is we've had -- I have talked about this in previous calls. I have had independent experts look at this. We've got independent reserves experts look at this. Everything we're getting told is that we are going to be in the range of up towards -- what GLJ said is 9.89 TCF. The actual answer is, I won't know until we do the -- put the three appraisal wells in the ground. So I think it's better for me to be transparent and show the range of outcomes.
So if I take it from 5.4 TCF, which is just literally the start of -- the top end of the bottom tranche and I go up to the top end of -- the high cases of GLJ, you see, I've got a range of $1.5 billion to $5.3 billion -- it's uncapped. If we discover another extra 5 TCF on top of that, we will be richly rewarded. We feel that to be fair to Total. Total will be paying for the molecules. On the downside, if there's less there, we get paid less. But also it's very important, there is no cap on this. So if this field grows and grows, which we obviously hope it will, we will be richly rewarded for that. Actually Total will make a lot of money out of it, as well, as we get a little bit more trained.
------------------------------
Evan Calio, Morgan Stanley - Analyst [8]
------------------------------
Answer a question just on the deal process. Can you comment in terms of where the size intentions on the deal were? Meaning, were you trying to maximize the percentage of the PRL that you held, post deal? If so, what was the premium that you valued on the interest held versus the interest sold?
------------------------------
Michael Hession, InterOil Corp - CEO [9]
------------------------------
Well, we were driven, actually, more by doing a fair deal that encouraged a certainty of development; yes? So I never wanted to get in a situation -- there are certain things I would not have done, okay? I will give you an example of that is: a huge amount of money paid, for instance, to FID because if you have a huge premium FID, let's say Total would have to pay me $3 [billion], $4 billion, $5 billion of FID, that actually prejudices your chance of getting this thing away. So we were using -- what we did is a series of payments, which we thought were fair. Those payments, as we said: one to completion; one to FID; one to first cargo; and obviously, then the ones at reserve certification.
So there is four. So, they're spread evenly. So you don't get unusual behaviors in the JV. The aim of our process here was to get the development away; therefore, create a situation where if there is upside, we get rewarded for it reasonably, but not so unreasonably that it encourages Total not to develop these things. Now, in terms of -- actually the resource payment, these appraisals go down. You will see in the SPA, we have got an ability to actually call when that reserve certification gets made. Now, that's good because if you've fixed it on a particular point, you could actually gain in the appraisals process.
But what we've both sat down and said, look, we can call it. Because we can call it and we're getting two sets of independent auditors in or certifiers in, we are just trying to take all the ability -- we worked together here. We tried to take all the ability to gain this out and to make sure this thing got developed in the best way for both companies and for PNG. So I didn't focus on a premium; a certain time; or certain percentage; yes? It was trying to make the things look reasonable right through the lifecycle of the development.
------------------------------
Evan Calio, Morgan Stanley - Analyst [10]
------------------------------
Right. The variable -- the amount due upon the appraisal, you're saying that's due once the appraisal's complete, which is expected to be 2015?
------------------------------
Michael Hession, InterOil Corp - CEO [11]
------------------------------
Yes. But we're going to put down two wells before November next year. We'll just run that program through. Yes?
------------------------------
Evan Calio, Morgan Stanley - Analyst [12]
------------------------------
Yes.
------------------------------
Michael Hession, InterOil Corp - CEO [13]
------------------------------
Obviously, we're fairly confident that we're in acceptance at the 5.4 TCF. We think we will go further than that. We'll get rewarded when we call that reserve certification after those three appraisal wells.
------------------------------
Evan Calio, Morgan Stanley - Analyst [14]
------------------------------
Great. Lastly, if I just could, just to square the circle, you say that you get paid for any upside for gas in PRL15. That's $100 million per Tcfe over a TCF discovery. It states that there is one well. Is there one exploration well? Or is it one exploration well per structure that defines the upside? I know these are details in the SPA, but do they matter?
------------------------------
Michael Hession, InterOil Corp - CEO [15]
------------------------------
So there is one exploration well that we get counted for. I will be quite frank with you, there is a very large prospect that we wish to test. That is the major driver for us in PRL15. We were very keen -- there is a large prospect that could be -- it's an exploration prospect, I'll be clear, that could be of a similar or bigger size to Elk-Antelope. We were very concerned that we got rewarded if we made a discovery in that space. So it's largely driven by that one -- that very large prospect that we've got. I'll be showing you more about that in the future.
------------------------------
Evan Calio, Morgan Stanley - Analyst [16]
------------------------------
Is that -- when -- is that the next tranche of wells other than, I think, the four that you have planned here, starting now into 2014? When should we expect that? When do you expect to drill that prospect, that exciting prospect?
------------------------------
Michael Hession, InterOil Corp - CEO [17]
------------------------------
I expect it'll be the back end of 2014, early 2015. We are planning it at the moment. We are defining it. It will depend a little bit on how some of the seismic comes up. But what I can tell you is all the parties who were interested and looked at this transaction were all excited by that prospect. Again, I'm going to caveat this. It's exploration. But it's an elephant.
------------------------------
Evan Calio, Morgan Stanley - Analyst [18]
------------------------------
That's great. I guess -- well, I said last, but let me make last here. Are you -- is there any change to the rate count now that you -- to move the three appraisal wells and this exploration and you have more significant funding; going forward, did you expect to ramp the rate count even more?
------------------------------
Michael Hession, InterOil Corp - CEO [19]
------------------------------
I am -- I'll be honest with you. I am considering it. We are in a position where we've got four. The guys are doing some further work. There has been things that have turned up as a result of the due diligence of the Company that I've looked long and hard. I've asked the team to consider a fifth rig. So we are considering that. We are scoping it. We are actually in discussions about it, but we have not yet committed to that. But you are getting a sense of where it's going; yes?
------------------------------
Evan Calio, Morgan Stanley - Analyst [20]
------------------------------
Yes. Great. Look, I appreciate it. I look forward to seeing the SPA. I look forward to seeing you guys market on the back of this deal.
------------------------------
Michael Hession, InterOil Corp - CEO [21]
------------------------------
Okay. Good on you. Thank you very much.
------------------------------
Operator [22]
------------------------------
Raymond James, Pavel Molchanov.
------------------------------
Pavel Molchanov, Raymond James & Associates - Analyst [23]
------------------------------
Congratulations. It's been a long time coming. Can I ask first about taxes on this? So will InterOil have to pay income tax in either -- in, I suppose, any of your jurisdictions on, for example, the $613 million upfront payment?
------------------------------
Michael Hession, InterOil Corp - CEO [24]
------------------------------
I am going to -- I've got Collin in the room here. I'm pretty sure I know the answer to that, but I call across to Collin. Collin?
------------------------------
Collin Visaggio, InterOil Corp - CFO [25]
------------------------------
So what Total are buying is an interest in the license, which is related to a capital event. In PNG, there is no capital gains tax.
------------------------------
Pavel Molchanov, Raymond James & Associates - Analyst [26]
------------------------------
Okay. That is applicable to both the upfront payments and any future variable payments, is that right?
------------------------------
Collin Visaggio, InterOil Corp - CFO [27]
------------------------------
Those payments are related to the purchase price of the acquisition of the license.
------------------------------
Pavel Molchanov, Raymond James & Associates - Analyst [28]
------------------------------
Okay. That's clear. Thank you. On the certification and appraisal process; you have indicated that the wells will be drilled by 2015. So does that mean that by sometime in 2015 it will be clear what the ultimate transaction value is, that InterOil stands to receive? Or is that going to take some time beyond that?
------------------------------
Michael Hession, InterOil Corp - CEO [29]
------------------------------
Look, I think, it's fair to say that by 2015 we'll have a very good idea. But we -- the answer to that is, if it's still going north, we may actually not know until 2015, because there is a second certification we've got in the SPA, which you'll see, which captures the upside. So we'll have it in 2015. But if we still see, let's say there is another potential 4, 5, 6, 7 TCF as we've appraised it, we've actually got a second certification in there we can call. That would mean we would get another tranche -- well, we'd have a real understanding possibly in 2016.
------------------------------
Pavel Molchanov, Raymond James & Associates - Analyst [30]
------------------------------
Okay. Clear. Then last one from me. I apologize if perhaps I'm repeating a question that was previously asked. But can you state precisely what will happen to the Indirect Participation Interest holders as part of this transaction? Because in the press release, it looks like their interests will be zeroed out following the conclusion of the transaction.
------------------------------
Michael Hession, InterOil Corp - CEO [31]
------------------------------
Exactly. You've got it. That's exactly what it's supposed to look like. That's exactly what's going to happen. [That we're not going to lie.]
------------------------------
Pavel Molchanov, Raymond James & Associates - Analyst [32]
------------------------------
So who is buying them out?
------------------------------
Michael Hession, InterOil Corp - CEO [33]
------------------------------
Well, we are.
------------------------------
Pavel Molchanov, Raymond James & Associates - Analyst [34]
------------------------------
You're buying them out for cash or equity?
------------------------------
Michael Hession, InterOil Corp - CEO [35]
------------------------------
That's on foot at the moment. But let me tell you it will be mutual with respect to the deal. But the exact amount is to be determined. We're in advanced -- very advanced stages of that purchase at the moment.
------------------------------
Pavel Molchanov, Raymond James & Associates - Analyst [36]
------------------------------
When do you think that will be finalized? Would you say that will be before the --
------------------------------
Michael Hession, InterOil Corp - CEO [37]
------------------------------
Yes. I'm hopeful that will be finalized no later than January. I'm actually -- well, yes, let me be cautious. No later than January. Let me try and continue to under promise and over deliver.
------------------------------
Pavel Molchanov, Raymond James & Associates - Analyst [38]
------------------------------
Okay. All right. Thank you very much.
------------------------------
Michael Hession, InterOil Corp - CEO [39]
------------------------------
Yes.
------------------------------
Operator [40]
------------------------------
Westlake Securities, Chris McDougall.
------------------------------
Chris McDougall, Westlake Securities - Analyst [41]
------------------------------
Congrats on the deal announcements.
------------------------------
Michael Hession, InterOil Corp - CEO [42]
------------------------------
Thank you.
------------------------------
Chris McDougall, Westlake Securities - Analyst [43]
------------------------------
So the exploration well and the exploration in general, I want to make sure I understood how that was treated. So if -- it's not related to the appraisal, but due to an exploration well in PRL15, if you find, so let's say 2 TCFs of gas or pick a number, you'll get $200 million and you'll own 30% of that gas that was found? You won't have any -- none of that gas will be applied for the Elk-Antelope levels that you gave that were more like a $1.00 in Mcf, correct?
------------------------------
Michael Hession, InterOil Corp - CEO [44]
------------------------------
Yes. Almost correct. Almost correct. Let me just go through it. First of all, we are getting carries for that well, okay? Secondly, if it's a 5 TCF, we get $400 million. So, the first TCF, Total gets free. So, the way you described it was, there are 2 TCF and $200 million. If it was 2 TCF, it would be $200 million, okay? -- $100 million, excuse me, $100 million. So the first TCF they get free. So, let me give you an example, if there is 11 TCF, we would get $1 billion. Is that clear?
------------------------------
Chris McDougall, Westlake Securities - Analyst [45]
------------------------------
Yes. So that's clear. Then it --
------------------------------
Michael Hession, InterOil Corp - CEO [46]
------------------------------
Sorry. I will just finish answering your question. Where -- you're absolutely right; given it's undiscovered gas, we didn't expect the counter-party, Total, to pay what effectively would be $1.29/Mcfe for undiscovered gas. I mean, that's just unheard of and unreasonable. So you're absolutely right. It's a separate payment structure for the exploration -- or for the -- there's a payment structure for discovered and to be appraised yet. There is a payment structure for yet to be found gas.
------------------------------
Chris McDougall, Westlake Securities - Analyst [47]
------------------------------
Okay.
------------------------------
Michael Hession, InterOil Corp - CEO [48]
------------------------------
You've basically got it right apart from that nuance around --
------------------------------
Chris McDougall, Westlake Securities - Analyst [49]
------------------------------
Yes. Okay, I got it. So in the limit that you found very high resource, it would be like them paying effectively $0.33 in Mcfe for the gas, disregarding the 1 TCF that they get for free. So --
------------------------------
Michael Hession, InterOil Corp - CEO [50]
------------------------------
It's in that -- excuse me, it's in that --
------------------------------
Chris McDougall, Westlake Securities - Analyst [51]
------------------------------
Yes. Okay. I just want to be mindful of our time here. So you're going to be -- you're going to have a 30% stake in the LNG project afterwards. You're going to be, not carried, but you're going to be making your capital commitments just as Oil Search has made its capital commitments for the 29%. Is that comparable? I mean, was that part of what you were looking at here with this transaction, is getting to that sort of a manageable percentage for a Company your size to go forward?
------------------------------
Michael Hession, InterOil Corp - CEO [52]
------------------------------
Yes. I think it's fair so say. I'm sure Oil Search went through the same thought process. We didn't specifically use Oil Search. We did a fair bit of work in the market through Collin and other members of the staff. We came to a conclusion that was a combination of a manageable amount, but also sufficiently material. I'll go back to it. One of the major attractions in working with Total is they were keen for us to have a material position here, which would make a real difference in this Company. When I talked about transformation, 30% of an LNG project, that's transformation for InterOil. That's what's so exciting about it.
------------------------------
Chris McDougall, Westlake Securities - Analyst [53]
------------------------------
Yes. Agreed. Could you give us an idea of the split between -- we know the $611 million is getting paid effectively upfront first quarter of next year. But then the other payments for the additional gas above the threshold; I understand that some of those are split at certification and some are split at FID and maybe some other split. But can you give us the rough percentage before we see it in the SPA?
------------------------------
Michael Hession, InterOil Corp - CEO [54]
------------------------------
Well, the percentages -- I mean, I can give you the precise figures. I mean, it's $613 million at completion. It's $112 million at FID and $100 million at first cargo. So those are the actual dollar numbers. Now, the big swinger is obviously the resource payment; yes?
------------------------------
Chris McDougall, Westlake Securities - Analyst [55]
------------------------------
Right. That was what I was asking about.
------------------------------
Michael Hession, InterOil Corp - CEO [56]
------------------------------
Yes. So, look, I think that's very similar to our friend at Raymond James asked. It's going to be -- I predict 2015 where we'll be getting that resource payment. But I also would like to remind you, there is a second certification event, which would -- I don't know when we are going to call that because it's a wildcard. We can call it when we want to. But you could get that because we called them in 2016? Yes. I mean, again it's going to depend how the thing gets appraised and how the thing grows; yes?
------------------------------
Chris McDougall, Westlake Securities - Analyst [57]
------------------------------
So there are two resource certifications events. You get the right to call the timing of each one?
------------------------------
Michael Hession, InterOil Corp - CEO [58]
------------------------------
Of each one?
------------------------------
Chris McDougall, Westlake Securities - Analyst [59]
------------------------------
Yes. You said there were two --
------------------------------
Michael Hession, InterOil Corp - CEO [60]
------------------------------
-- the timing of each one. Yes, there are two. One is the appraisal program; yes? So that's not really us having to really say, yes, it's under the appraisal program. Then there is a wildcard. So the wildcard is the one that we can call when we want to; yes? So the wildcard; we can call that within a certain period. But the first one is after the third appraisal well.
------------------------------
Chris McDougall, Westlake Securities - Analyst [61]
------------------------------
Okay.
------------------------------
Michael Hession, InterOil Corp - CEO [62]
------------------------------
The reason for that -- I want to be clear about it. The reason for that is it can't be gained; yes? We can't put appraisal wells in certain locations or we can slow down work, et cetera, et cetera. It will just allow us to appraise this thing properly. No reason -- I probably won't know when we are going to call it. So you just got to get on with it.
------------------------------
Chris McDougall, Westlake Securities - Analyst [63]
------------------------------
Okay. Fair enough. So to circle back to the resource payment and the timing; so taking your upside scenario here of 11.8 Tcfe in Elk-Antelope. That would be a resource payment of $5.3 billion grows to the IOC and the IPI interest. So that would be payable upon certification, like all of that $5.3 billion? Or would that be spread out between certification and first gas?
------------------------------
Michael Hession, InterOil Corp - CEO [64]
------------------------------
One second, let me be certain. Yes, we're just going to go through -- just to be clear, everything over 5.4 TCF is what is payable at certification, okay? So, to your point, we've got 11.8 TCF -- you'll see this in the table -- 11.8 TCF, we will get a $5.3 billion payment. Yes?
------------------------------
Chris McDougall, Westlake Securities - Analyst [65]
------------------------------
When is that paid? That's at certification? Just to be clear with the audio on the line.
------------------------------
Michael Hession, InterOil Corp - CEO [66]
------------------------------
Where that will be -- there's two potential times. I am sorry about this because we've deliberately made two certification events, yes? So here's an example: we could get somewhere along that line -- let's say we got to 7.5 TCF or 7.9 TCF, okay? Let's say, we got to 9.89 TCF at the end of three appraisal wells. Then we'll be looking at the $4.2 billion payment. Now, if it grew further and we called it when it reached 11.79 TCF, we'd get a further payment. So -- I can fully understand people want to know exactly when the payments will be made.
But we've deliberately structured it so it isn't a specific time, because historically when you do these deals -- I've been involved in this before; when you say there is going to be a certification event on January the 15, 200x, what happens is, one party will try and gain it so their reserve stays below that. Suddenly the reserve jumps when you get past January 15, 200x. So we've got the ability to move them around. When you move them around, people can't gain the reserve certification on a particular date. Am I making it clear?
------------------------------
Chris McDougall, Westlake Securities - Analyst [67]
------------------------------
Yes. I think so. To make -- I think from an investors point clear, I don't think that for the cash flows, I don't think the investors are concerned about if it came at the first certification or the second or what. It's more, does it come at a certification event, which is viewed as the next two, three years? Or does it come at first gas, which is longer.
------------------------------
Michael Hession, InterOil Corp - CEO [68]
------------------------------
Okay. Excuse me. All right. There will be -- if there is no gas there will be a certification event in the next two or three years. But there is no time that we'll be out in seven years time or six years time. Yes. If that's what you're worried about, no. That's not the plan. At that time -- no, that's not the plan. What we do have is, again, I'll go back to it, we have the ability to call a wildcard. We have got a boost to call a wildcard like that. We can call that wildcard as late as 25% of the way through to production. Because, as you know, these things come online, right? You start to understand how much gas you've actually got. So what we've created is a window where we can call that wildcard.
------------------------------
Chris McDougall, Westlake Securities - Analyst [69]
------------------------------
Yes. That's fantastic, Michael. I'll tell you, honestly, that's not something that I was thinking about. That just kind of indicates that you have done this before. You have seen a number of the things. You also engineered this deal appropriately. From the investor's standpoint, it's more of, am I going to have to wait to see this cash for a long time? I think we're crystal clear on, whatever this resource payment ends up being, the vast majority of it will show up at certification. So you can just confirm that again.
------------------------------
Michael Hession, InterOil Corp - CEO [70]
------------------------------
Yes. Look, I think you're right. But, again, we could get a real nice surprise. That's why we've got the wildcard. I think with the bounce of probability, you are absolutely right. But we have got the wildcard just in case, something geologically unusual happens. That's why we structured it so we don't sit there and lose it.
------------------------------
Chris McDougall, Westlake Securities - Analyst [71]
------------------------------
Yep. No. That's fantastic. So I guess what I would like is, if you could -- the numbers that you ran through again at the beginning of the call. If -- since it might take a while for that to get released, maybe everybody would appreciate if you just ran through those payment levels again, so we can do our math?
------------------------------
Michael Hession, InterOil Corp - CEO [72]
------------------------------
I can do that. But we'll hopefully get this out within an hour. But let me give you -- so the payment at completion is $613 million. The payment at FID is $112 million. The payment at first cargo is $100 million. Then I'm going to go to the pricing table, okay? (multiple speakers) The pricing table; right; the first tranche is 3.5 Tcfe to 5.4 Tcfe; that will give you exactly why Total put up 5.4 Tcfe. They just picked that point, yes? The second tranche is 5.4 Tcfe to 6.5 Tcfe. The third tranche is everything over 6.5 Tcfe, okay? Now, let me go through how you get rewarded. In that first tranche, which is 3.5 Tcfe to 5.4 Tcfe --
------------------------------
Chris McDougall, Westlake Securities - Analyst [73]
------------------------------
Okay. So everything over 6.5 Tcfe is the last tranche?
------------------------------
Michael Hession, InterOil Corp - CEO [74]
------------------------------
Yes, definitely.
------------------------------
Chris McDougall, Westlake Securities - Analyst [75]
------------------------------
Okay.
------------------------------
Michael Hession, InterOil Corp - CEO [76]
------------------------------
All right. So, okay, so you've got three tranches, all right?
------------------------------
Chris McDougall, Westlake Securities - Analyst [77]
------------------------------
Yes. Got it.
------------------------------
Michael Hession, InterOil Corp - CEO [78]
------------------------------
So let's -- we're going to fill them in with two numbers. Pre-government back-in, ie, gross. That's $0.60 an Mcfe. Now, when you assume that the PNG government comes in and takes 22%, it's actually net $0.70 -- $0.77, excuse me. $0.77/Mcfe, okay? So first tranche is $0.60 gross, $0.77 net. Second tranche 5.4 TCF to 6.5 TCF: that is gross, $0.80; net, $1.03. The final tranche is 6.5 TCF. Okay, gross is anything over 6.5 TCF: gross we get a buck, that's $1/Mcfe; when you net that, that's $1.29/Mcfe.
------------------------------
Chris McDougall, Westlake Securities - Analyst [79]
------------------------------
Great. Those are marginal numbers, so it's just like income taxes? As you go up, you get on the margin between that? So then, I think we're squared away on the IPI holders. But it sounds like it's, for modeling purposes, it's going to be completely pass-through. So if we take your 58.6% net working interest going into this deal after the government back-in and multiply it by these figures, then we should get the value that will end up to you. There will be kind of pass-through economics to the IPI holders?
------------------------------
Michael Hession, InterOil Corp - CEO [80]
------------------------------
Yes. We've made some assumptions to what the volume is and obviously therefore what the price is. So, yes. My objective is a deal that is a value mutual deal. So my objective is that the IPI's get fairly rewarded. They get rewarded for what's market price. Obviously, we've established what the market price is here today.
------------------------------
Chris McDougall, Westlake Securities - Analyst [81]
------------------------------
Then lastly, for valuing the LNG project, the Company, a couple years ago before you joined, put out a presentation as part of an Investor Day that gave some cost estimates for an LNG project using your resource. It had some operating costs and so forth. So, recognizing that all of this will be part of the seed study, I was just curious if you'd had a chance to review that and had any general sense on if the operating costs were in line with expectations, aside from maybe some inflation and so forth? Because those numbers are much lower than some of the other industry examples. Those maybe had their own things going on.
------------------------------
Michael Hession, InterOil Corp - CEO [82]
------------------------------
Chris, look, it's too early to say. We have got to do the [BOD]. We have to do the FEED. We've got to understand the engineering. You have got to understand the market when you go out to bid these things. I don't think it'd be totally unreasonable to use PNG LNG numbers if you are were looking for some sort of guidance. But I can't comment on numbers that were created by this Company two, three years ago in a different market and different engineering scheme. So, I'm not even going to reference those. I think the Mcf that will be very clear when we do BOD and FEET. Actually, we'll only know what this thing costs when we go out and bid it. (multiple speakers)
------------------------------
Chris McDougall, Westlake Securities - Analyst [83]
------------------------------
Yes. Okay. Fair enough. GLG -- or GLJ will be one of the certifiers? Or is that to be determined?
------------------------------
Michael Hession, InterOil Corp - CEO [84]
------------------------------
Well, we are -- GLJ will not necessarily be the preferred one. We are going to be able to choose our own certifiers. Total will be able to recommend a certifier. We will recommend a certifier. We have not decided who that is yet.
------------------------------
Chris McDougall, Westlake Securities - Analyst [85]
------------------------------
Okay. And --
------------------------------
Michael Hession, InterOil Corp - CEO [86]
------------------------------
Understand, I am not saying it's not GLJ. I'm just saying we've got flexibility there; yes? (multiple speakers)
------------------------------
Chris McDougall, Westlake Securities - Analyst [87]
------------------------------
Okay. But you each get to choose one?
------------------------------
Michael Hession, InterOil Corp - CEO [88]
------------------------------
Yes. What I like about it -- sorry, is that Total gets to choose one. We get to choose one. So, it's absolutely fair.
------------------------------
Chris McDougall, Westlake Securities - Analyst [89]
------------------------------
Then in the event of a difference, it averages? Or it's got to be within some tolerance range?
------------------------------
Michael Hession, InterOil Corp - CEO [90]
------------------------------
It averages.
------------------------------
Chris McDougall, Westlake Securities - Analyst [91]
------------------------------
It's like a -- it's a C2 number that everything is based off of, correct?
------------------------------
Michael Hession, InterOil Corp - CEO [92]
------------------------------
Yes.
------------------------------
Chris McDougall, Westlake Securities - Analyst [93]
------------------------------
Okay. Thank you very much. Congrats on getting this done and all the transparency. It takes a little bit to get through the various complexities. But we appreciate the transparency and look forward to going forward.
------------------------------
Michael Hession, InterOil Corp - CEO [94]
------------------------------
Okay. Great. What I will say -- thank you very much. Thank you for the questions. But really it's all about looking at the SPA. As I said before, our aim is to give everybody an absolute ability to see through the value and go through the SPA. Study it. Look at it. We will take questions on it. We can take -- we will take clarifications. We will no doubt be visiting with some of you. We'll be back on another conference call, I am sure, in the not-too-distant future. It is quite difficult -- these LNG projects are big and complex. These sorts of transactions are big and complex. Therefore, while I believe we have described it reasonably well today, I think it's important that one looks at the SPA and you will get to see the nuances of the deal.
Okay. Are we taking any more questions? Or are we done? Wayne. I'll hand across to you, Wayne.
------------------------------
Wayne Andrews, InterOil Corp - VP - Capital Markets [95]
------------------------------
Hello. Moderator, I believe we've run out of time. We're going to end the call. Do you have any closing remarks, Michael?
------------------------------
Michael Hession, InterOil Corp - CEO [96]
------------------------------
Well, I'm pretty happy, is probably my closing remark. I came into this Company to do a number of things; to ensure that we were stable; we were spending our money prudently; and we were well financed. Well, as you see, we've done that. We've delivered in that space. I came in to -- and brought a team in to deliver on Elk-Antelope. Elk-Antelope is ready to be moved forward to a development. I felt that quite strongly when I joined the Company. I had a target. I admit I didn't tell everybody until later in the piece what the target was, which was the end of the year. I believe that now we've delivered ahead of time there.
The exploration licenses: well, that's actually gone better than we thought. We obviously got Triceratops today. We've got assurances from the PM and the Minister of Energy that our exploration licenses will be renewed. You'll be well aware that we've got rigs up on -- we've got well clearing going on, on three prospects at the moment. We'll be looking at, I believe, a very exciting period in the exploration sense in Q1 and Q2 next year. So, we're on track, guys. We've got a development. We've got a good solid, financially stable Company. We've got a lot of exploration upsides.
Some of the team that are sitting around this table are looking pretty tired. But we're on top of that -- we're really, really, very excited. It's great to be in a Company like this. The future is really now coming into focus. Of course, on top of that, I've got a very good partner in the form of Total. Very, very happy to have Total on board. I think that's going to be the catalyst, I think -- the catalyst for the transformation and the vision of where we're going to take this Company, which will be a bigger and better, real LNG oil and gas Company. That's it.
------------------------------
Wayne Andrews, InterOil Corp - VP - Capital Markets [97]
------------------------------
Great. Thank you very much, Michael. I will be available to take some questions today. I will try to reach you all who have questions. Thanks for your time and participation.
------------------------------
Michael Hession, InterOil Corp - CEO [98]
------------------------------
Good-bye, everybody.
------------------------------
Operator [99]
------------------------------
Ladies and gentlemen, that does conclude our conference. Thank you for your participation and for using AT&T. You may now disconnect.
------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the
Transcript has been published in near real-time by an experienced
professional transcriber. While the Preliminary Transcript is highly
accurate, it has not been edited to ensure the entire transcription
represents a verbatim report of the call.
EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional
editors have listened to the event a second time to confirm that the
content of the call has been transcribed accurately and in full.
------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other
information on this web site without obligation to notify any person of
such changes.
In the conference calls upon which Event Transcripts are based, companies
may make projections or other forward-looking statements regarding a variety
of items. Such forward-looking statements are based upon current
expectations and involve risks and uncertainties. Actual results may differ
materially from those stated in any forward-looking statement based on a
number of important factors and risks, which are more specifically
identified in the companies' most recent SEC filings. Although the companies
may indicate and believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate or
incorrect and, therefore, there can be no assurance that the results
contemplated in the forward-looking statements will be realized.
THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2018 Thomson Reuters. All Rights Reserved.
------------------------------