Why InterOil's Big 2013 Gains Evaporated in 1 Day

Editor's note: The current version of this article has added further clarification on the terms of the agreement between InterOil and Total. The full press release containing InterOil's summary of the deal can be found here. 

Just a few short weeks ago, oil and gas exploration company InterOil (NYSE: IOC) looked poised to deliver huge returns to its shareholders in 2013, with its stock up 60% from the beginning of the year. But an early December deal with Total (TTE -0.32%) to bring its Papua New Guinea natural gas fields closer to producing actual profits for InterOil sent the stock plunging, giving up all of its gains for the year and then some. In the aftermath, shareholders realized just how poor a bargaining position InterOil had in getting its gas to market, especially after failed negotiations with ExxonMobil (XOM 0.02%) and Royal Dutch Shell (RDS.B) had failed to bear fruit. Let's take a closer look at what happened with InterOil this year and whether its stock will bounce back in 2014.

InterOil's Rig #2 at Antelope-2 drilling location. Source: InterOil Media Relations.

The rise and fall of InterOil stock
InterOil's gains throughout the first part of 2013 hinged on the ongoing development of its Elk and Antelope fields in Papua New Guinea. In March, the company said that it had gotten approval from the Papua New Guinean government for its planned liquefied natural gas export facility and was seeking a partner to help it build the facility. That assertion brought disagreement from government officials, with the petroleum and energy minister reiterating his position that InterOil had to get a partner on board with an established LNG track record before the government would sign off on the deal.

The speculation grew in May, when ExxonMobil said that it was in exclusive talks with InterOil to buy a working interest in the Elk and Antelope fields. With Exxon already planning an LNG export terminal on the island nation in order to monetize its own natural-gas production there, the move made sense from a synergy standpoint, and investors sent shares soaring. Even as those talks went for months without going anywhere, shareholders remained fairly confident, and a key loan in November looked like it had given InterOil the time it needed to conclude a favorable agreement.

InterOil Total Return Price data by YCharts

But all of those gains came to an abrupt end when InterOil announced its final deal not with ExxonMobil but rather with French energy giant Total. Under the deal, Total paid just $613 million to get a 61.3% stake in the Papua New Guinea license covering the Elk and Antelope fields, with further payments totaling $212 million dependent on milestones including final investment decision toward an LNG facility and the first delivery of liquefied natural gas from that facility. Even with additional milestone payments if production exceeds certain levels that InterOil estimates in various illustrations could bring the final amount paid under the agreement up to $1.5 billion to $3.6 billion, some InterOil investors felt betrayed by the deal. 

The problem InterOil faced in hammering out a deal was that it had very little leverage. Without any way of utilizing the natural gas it had discovered locally, InterOil had to find a way to export it. Yet much of the disappointment came from the fact that Exxon already had its LNG facility in the works, and with plans to start exports as early as next year, InterOil could rely much more heavily on its being able to begin monetizing its gas fields sooner rather than later. Under the current deal, Total doesn't even have the obligation to build an LNG facility at all, leaving InterOil with substantial uncertainty going forward.

Stats on InterOil

Source: S&P Capital IQ.

What's next for InterOil?
As a result of the Total deal, InterOil investors have to wait on its French partner for clues on when it might start seeing profits from InterOil's Papua New Guinea holdings. Total expects to spend the next two years appraising the size of Interoil's reserves and not even decide on whether to move forward with an LNG export facility until 2016.

As a result, InterOil's stock isn't likely to produce big gains in the near future. With no signs that a rival bidder could come in and disrupt InterOil's agreement with Total, shareholders need to hope that demand for natural-gas exports is still as strong by the time Total's appraisal process is complete as it is today.

Click here to add InterOil to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.