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Whitney Tilson: Endgame for InterOil

October 02, 2011 | About:
The debate between Bruce Berkowitz and David Einhorn over St. Joe is well known. However another company, which has two gurus on both sides of the trade has garnered much less attention:

InterOil. George Soros is long (it’s his largest position), and Whitney Tilson is short the company. Soros runs a very diversified portfolio, so at 3.24% of his portfolio, it is quite a large holding.

Below is a brief description of the company:

InterOil Corporation primarily engages in the exploration, appraisal, and development of crude oil and natural gas properties in Papua New Guinea. It also involves in the refining and liquefaction of jet fuel, diesel, and gasoline, as well as naphtha and low sulfur waxy residue. In addition, the company engages in the wholesale and retail distribution of diesel, jet fuel, gasoline, kerosene, and fuel oil, as well as branded commercial and industrial lubricants, such as engine and hydraulic oils. As of December 31, 2010, it provided petroleum products to 52 retail service stations, including 42 operating under the InterOil brand name and 10 operating under its own independent brand. The company also operates approximately 11 aviation refueling facilities in Papua New Guinea. InterOil Corporation was founded in 1990 and is based in Cairns, Australia.

Below are some recent comments which Whitney Tilson’s friend made about IOC to him (usually when Tilson quotes anonymous friends, it is high profile hedge fund managers).

Tilson: The end game for InterOil, which we’ve long maintained is one of the world’s biggest promotions, could be near as the Papua New Guinea government is forcing IOC to find a “world class LNG operator”, which we think will be impossible for IOC (at least on any reasonable terms). This is yet more evidence that IOC doesn’t have what it says it has. If it really had one of the largest natural gas fields on earth, why would it switch to a project that is different than the one than the government approved? Trying to delay and evade is exactly how we expect this company to act.

Here’s the analysis of a friend, who is a well-known short seller:

Although IOC has not put out any official statement today, it appears that they are now falling in line with the PNG government and have told the PM that they will to bring in a proven LNG operator to their project. So all of yesterday’s nonsense that the PM would shortly be backtracking was total hot air. Bizarrely, IOC chose to make this admission in a press release issued at lunchtime by IOC’s Norwegian would-be partner FLEX LNG (FLNG).

Just to go back a stage, Monday’s statement from the PNG government had included the following quote from the minister:

· While the “Gulf” Project includes a number of high quality companies, none are internationally recognized LNG operators with experience operating the world scale LNG Plant that LNGL/InterOil has contracted to deliver. Hence they do not fit the description or intent of a world class operator as contained in the Project Agreement.

Finansavisen, a Norwegian paper, claimed this morning that PNG government had “torpedoed” the project by insisting on a world class operator, which FLNG certainly is not. The full article is not online. FLNG replied with a short press release this morning and a longer one at lunchtime. The long release starts by saying that Finansavisen being is misleading. It says that IOC has confirmed to FLNG that they are still involved. But it also says:

· In order to strengthen the Gulf LNG project a world-class operator will be brought into the project. InterOil and FLEX LNG are jointly working to attract such an operator to the project.

And there is a quote from Mulacek:

· “LNG development in the Gulf Province has significant support in Papua New Guinea, as well as by the Gulf Ministers and local landowners where we have our vast gas and condensate development, as stated by the Minister of Petroleum late last night, and re-confirmed by the Prime Minister today in our meetings. A clarification which we agreed to today with the Prime Minister, is that the Petroleum Minister would like a proven LNG operator to join the project to strengthen LNG operations. InterOil has committed to ensure this occurs and will be working with all parties for a solid and successful outcome.

So buried at the bottom of a press release from a Norwegian operating partner is the admission by the CEO of IOC that they will have to respond to this move by the PNG government and will be required to bring in an additional LNG operator. Such a move will clearly not be done on IOC’s terms, since the alternative for IOC is to say goodbye to their entire upstream plans on which the project valuation depends.

This is consistent with the precise wording of yesterday’s “non denial denials” from IOC, but it is very far from the spin that RJ was giving me yesterday.

It is the first time that I have heard IOC or its partners suggest that a further operator will need to be brought in, with the implication being that this is a necessary condition of FID. Per the IOC spin until this point, FID was well on track and was due to take place by December 31. If they are waiting around to find another partner, that means delays once more and a further shredding of credibility.

I did a scan of the PNG press today. The main article about the controversy is a piece about the previous Petroleum and Energy Minister congratulating his successor on their decision to go after IOC. It makes these claims against IOC:

· The agreement was that InterOil would buy crude oil from Kutubu, refine it and supply petroleum products to the domestic market. Instead, it was buying refined petroleum products from overseas.

· It was also discovered that InterOil had deviated from an agreement to build an InterOil LNG project alongside the NapaNapa oil refinery. It instead opted for a different production method, a mini land-based trains and a fixed floating LNG plant.

The papers may have missed it, but as far as I can see the Prime Minister has yet to backtrack and fire his Energy Minister.

Also below is Macquarie’s note, which is pretty useless. It suggests that the PM may shake up the Energy Ministry – ignoring that yesterday’s statement was on behalf of the PM’s entire cabinet. It says “We find it difficult to judge the critical path and make a valuation call until we have further detail on how serious to take the Energy Ministry’s statements.”

No position

About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website


Rating: 3.2/5 (18 votes)

Comments

stpioc
Stpioc - 2 years ago
It's not InterOil that "says what it has", it's GLJ, which has vetted the resource three years running.

The change in plans are known for over a year and, until very recently, received very warm and public backing from PNG politicians, including Mr. Duma, the main critic now.

Could this have something to do with Shell trying to muscle into the project (and how consistent is that with IOC overstating what they have?)

http://seekingalpha.com/article/296565-is-shell-trying-to-muscle-into-interoil-s-lng-project

Duma argues he wants a world-class OPERATOR for the project. Is that necessarily inconsistent with the Gulf plans?
sltibbs
Sltibbs - 2 years ago
Based on GLJ figures, IOC is trading at<0.40/mcf for a high quality reservoir, similar to the Arun field. So, if one looks at similar seldown transactions, the price for such is for at least 3 times as much. Of course, I can't say politically what will happen with the IOC's LNG plant proposals, but based on PNG history I believe a seizure of IOC properties is highly unlikely, therefore, I am long IOC and believe this to be an excellent buying opportunity, especially given the projections for Asian LNG demand.

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