It took almost four years, but InterOil (NYSE:IOC) finally got a partner for its natural gas fields in Papua New Guinea. Last week, Total (NYSE:TOT) swooped in and made a deal to take the operator's stake in InterOil's Elk/Antelope natural gas fields. This deal came as a bit of a surprise considering that InterOil had made it public that it was negotiating with ExxonMobil (NYSE:XOM) to do something similar. The actual deal itself is rather complicated and much of it is predicated on how much natural gas is in the ground, and we could analyze the metrics of the deal up, down, and sideways. Without getting too deep into the semantics of the deal, here are the good, the bad, and the ugly parts of this deal.
The good: The deal was finally made
No matter how much natural gas is in the ground in Papua New Guinea, there was no chance that InterOil would be able to monetize it itself. Domestic demand for natural gas in Papua New Guinea is marginal compared to the size of the field, and InterOil was never going to be able to fund the development of the fields and an LNG export facility. This is why it was so important that a deal get done. Over these past few years, there have been talks with other oil majors such as Exxon and Royal Dutch Shell (NYSE:RDS-A), but nothing had yet to come of it until this past week when InterOil inked this deal with Total.
It's hard to find fault in teaming up with Total, either. The company has a history with LNG exports and has the deep pockets necessary to fund both field development and an LNG export facility. If this first joint development goes well, then Total has the right to buy into the other development licenses that InterOil holds on the island nation.
The bad: InterOil is now Total's pet
Because of the size of Total's share in the project, I guess we will have to start calling these natural gas fields Total's natural gas assets because it took a majority share in the project and is now the operator in the field. What this means for InterOil is that Total will have a much stronger say in the final investment decision when it comes to these natural gas fields.
This could be troublesome for InterOil because its assets are much less diverse than Total's. If Total were to delay development of these assets or possibly decide to not build the LNG facility, that would leave InterOil without too many options. This is one of the drawbacks from not doing a deal with Exxon. Exxon's PNG LNG facility is slated to come online sometime next year, so if InterOil had done a deal with Exxon, then there would be a much higher degree of certainty that these assets would get monetized.
This is a legitimate concern, but it goes back to the fact that InterOil had very few alternatives. It needed to do a deal with a major operator that would have the capital to develop the project. So it was walking into a situation where the other side of the negotiating table had a better hand to play.
The ugly: It will still take years before any gas gets flowing
As part of the deal, Total has asked that three appraisal wells be drilled to confirm the size of the find. Based on the schedule issed by InterOil, this process will not be completed until 2015. Also, Total does not intend to make a final investment decision on these fields or the LNG facility until at least 2016. This means that it could take another three to four years before any gas is commercially sold from these fields.
For InterOil, that isn't the most encouraging sign. While the payments Total will make will go a long way for the company, it will also its single refinery and distribution and marketing segment will be its only revenue-generating assets for the next several years. The cash generated from this business segment will not be enough to fund the development of the field, so it will need to hoard some of the cash from Total to cover development over that time period.
What a Fool believes
Up until now, InterOil has been a company that has traded on the speculation of its natural gas assets. Today, though, that has changed considerably because it now has a committed partner that has the wherewithal and the checkbook to develop these fields. There will continue to be arguments whether the company gave up too much control or that it didn't get enough money out of the deal, but that will fade in time and then investors will be mroe interested in how it can get that natural gas to market. We are still years away from InterOil realizing its goal of commercially selling natural gas from its fields in Papua New Guinea, but at least now there is a higher degree of certainty that it will happen.
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