Can You Trust This Natural Gas Company?

Investors who are willing to put their money behind a young company are putting a lot of trust in the company's management. That bond of trust can be shaky, because the slightest move that might bring things into question could send investors for the exits, and fast. Along those lines, there may be a storm brewing at InterOil (NYSE: IOC  ) regarding its LNG export facility, and it could cause investors' confidence to waver. Let's see what's going on and whether InterOil can wiggle its way out of it.

Stuck in the middle with you
On InterOil's most recent conference call, its CEO declared that the company had been granted approval for its 3.8 million-ton-per-year LNG export facility in Papua New Guinea, and that the company was in the process of selecting a partner for the facility. Well, apparently this is news to the country's petroleum and energy minister, William Duma. Making like a town crier, Duma took out full-page ads in the local papers in protest of this statement.  

He wanted to make it clear that the ministry was still holding firm in its position that both the exploration and production and midstream assets needed to be operated by an internationally organized operator with an LNG export history before the government would give its stamp of approval, per the original agreement that was fleshed out in 2009.

This isn't the first time the two have had a little dust-up. As recently as last May, the government was threatening to terminate its agreement with the company to build the facility because InterOil wasn't following the original plan of bringing on an internationally recognized operator.

Someone isn't being completely honest here, but its hard to determine who. From an investor's standpoint, though, it doesn't really matter, because the end result is bad news either way. If it's the company, then it shows that InterOil wasn't completely honest, which is something no investor wants to hear. If it's the PNG government, then it's being obstructive and will slow progress, especially considering the government took a minority interest in its Elk and Antelope fields. 

(Pacific) Ring of Fire
The LNG export business in the Pacific region has had its fair share of troubles as of late. Setbacks and delays seem to be happening more often than not. ExxonMobil (NYSE: XOM  ) has experienced multiple delays and budget overruns on its LNG facility in Papua New Guinea, bringing the final tally up about 20% to $19 billion. Similar budgetary overruns at ConocoPhillips' (NYSE: COP  ) Australia Pacific LNG facility in Australia has led the company to sell of some its interest in the project. Despite the interest from other majors to build out natural gas exporting facilities in the region, the headaches these companies have experienced will certainly make others think twice.

If there's anyone who should be happy about this news, it's Apache (NYSE: APA  ) and Chevron (NYSE: CVX  ) . Both of these companies are the joint owners of the Kitimat LNG export facility in British Columbia, and Canada's National Energy Board just recently approved a license for the facility to export LNG. Once completed, it will certainly put a dent in the operations from these other facilities that can't seem to get off of the ground. 

What a Fool believes
On Interoil's most recent conference call, it said it had finished collecting bids for the LNG export facility's operating partner and that it will be announcing its selection sometime this month. If that's the case, then it's quite possible this small war of words between InterOil and the PNG government will blow over quickly. With all of the steps the company will need to take to bring this natural gas vision to reality, the last thing it needs is a chilly relationship with the government. The idea InterOil is pursuing is solid and could return a small fortune for the company, but it's going to take some time.  

For patient investors, InterOil might be worth looking at, but don't expect great things from it for at least a couple of years. For investors looking for a more immediate return from a tried and true energy company, look no further than National Oilwell Varco. Not only does it have a strong presence all around the world, but its 60% market share in a booming industry also means this company could be making huge profits.To help determine whether it could be a good fit for your portfolio, you're invited to check out The Motley Fool's premium research report featuring in-depth analysis on whether NOV is a buy today. For instant access to this valuable investor's resource, simply click here now to claim your copy.


Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 17, 2013, at 9:15 PM, biotech101invest wrote:

    That's funny two respected wall street firms are recommending purchase here including Raymond James and these comments by Westlake:

    Here the summary

    InterOil Corporation (IOC or the Company) is an energy company with substantially all of its activities focused in Papua New

    Guinea (PNG), which is a resource rich nation just to the North of Australia and adjacent to Indonesia.

    • We assign a $115/share target price on IOC’s stock (see page 17). We believe IOC is substantially undervalued relative to the

    expected cash flows of its assets (see page 16) and undervalued relative to the universe of LNG transactions (see page 19).

    • The Company has a very large natural gas (9 Tcf) and condensate (135 MMbbls) discovery in PNG that has been verified by

    outside experts in its resource report. This large commercial discovery is well suited to underpin a proposed Liquefied Natural Gas

    (LNG) export project, which could cost effectively serve the fast growing Asian economies.

    • IOC’s gas fields should prove to be world class discoveries. The Company reports hydrocarbon column heights of 1,700-2,300

    feet and net pay of 1,465 to 2,088 feet for its three Antelope wells. For context, the Hides Gas Field which is set to supply an Exxon

    led LNG project in PNG has 100-200 feet of pay (see page 29). We take additional confidence in IOC’s assets, since Pacific

    Rubiales (TSX:PRE, Market Cap: $8.0 Bn) executed a ~$345MM deal for a 10% share in one of IOC’s fields (see page 14).

    • We believe the Company is close to finalizing its bidder selection to sell part of its natural gas discovery to finance the LNG project.

    The Board of Directors is in the process of evaluating the different bid proposals. In the coming weeks, we expect IOC to select a

    winning bidder, execute some type of accretive agreement with the bidder and seek PNG approval of the chosen bidder group.

    • We expect the Company’s stock to appreciate significantly over the coming months and years as the Company gets closer to

    realizing the substantial cash flows that will be provided by an LNG plant. In the short term, we expect volatility related to

    bidder selection and deal terms.

    • We expect the LNG project to generate ~$1.2 billion for the first liquefaction train (4 million tons of LNG/year or mmtpa) and

    ~$2.4 billion/year in the strong likelihood it is expanded 8 mmtpa. We expect IOC to retain 20-30% project interest.

    • We believe IOC can fund its project equity contributions and associated field development without accessing the capital

    markets. While the LNG project will require substantial capital investment, we believe ~70% of total project cost can be financed

    with project debt yielding ~7% and the remainder can be financed by IOC’s asset sell down. We quantify the conditions needed for

    IOC to satisfy it contributions through an asset sale (see page 18).

    • We believe IOC’s LNG project cost estimates are reasonable. The project is in the middle of the range of global LNG projects

    (Figure 16 on page 13). The Exxon led PNG LNG project had project specific cost drivers which drove its cost well above global

    benchmarks (See page 11).

    • We are confident the outlook for the LNG market is strong enough for an accretive and financeable project (see page 7).

    • We believe the project will be approved by the PNG government. While the bidding process was delayed by government

    uncertainty, we believe the new administration is behind the project, and the country needs to keep its development advancing as the

    Exxon project construction concludes this year (see page 10).

    • We believe PNG is a good location for an LNG project given its very attractive tax policy (see page 9) and a reasonably stable

    social/political environment. We are encouraged that the Prime Minister is shielded from a new election until Feb-2015,

    which will increase stability and provide enough runway for the project (see page 8).

    • We recognize that the stock has had a strong move off of its recent low, but point out it is trading in the middle of its 52 week range,

    as the story is being derisked. We are long term buyers at current levels and aggressive buyers on any pullbacks.

    • While we find the stock compelling, we acknowledge a number of risks given the Company’s early stage and primary operations in

    a developing country. We have highlighted these risks throughout the report and particularly in the Risks section on page 20 in

    addition to the standard disclosures on page 30

  • Report this Comment On March 18, 2013, at 11:12 AM, GETRICHSLOW2 wrote:

    This one has a lot of risk and the company is dealing with a lot of political issues with the local government.

    Do your homework carefully before investing.

Add your comment.

DocumentId: 2317024, ~/Articles/ArticleHandler.aspx, 7/22/2014 7:55:39 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement