What: Shares of InterOil Corporation (USA) (NYSE: IOC) are up 38.9% at 12:40 p.m. ET on May 20 following the announcement that the company had agreed to be acquired by Oil Search Limited (ADR) (NASDAQOTH: OISHY).
So what: The short version is that Oil Search will pay 8.05 shares of Oil Search for each share of InterOil, which works out to be $40.25 per share in U.S. dollars, per the announcement. It's also important that U.S. investors note that this isn't per ADR, which currently trades at around $50 each on the U.S. markets, but for each share as traded on the Australian exchange, and currently valued at around $6.83 Australian, roughly US$9.49 based on current exchange rates.
There's also a contingent value right that is part of the deal as well. According to the agreement, InterOil shareholders would receive another $6.05 USD per share for each tcfe of hydrocarbons above 6.2 tcfe found to be contained in InterOil's holdings in the Elk-Antelope fields, and will be paid in cash once the certification process to determine the resource is complete.
In a separate agreement that's key to making the whole transaction work, particularly the cash-payment portion of the deal, Oil Search has signed an agreement with Total SA (ADR) (NYSE:TTE) to sell it a portion of the asset interest acquired from InterOil, as well as 62% of InterOil's exploration assets. The Total deal, of course, is subject to the closing of the acquisition of InterOil by Oil Search.
And while this isn't a huge deal for a massive integrated major like Total, it's still an important one, considering that the Elk-Antelope project, which has multiple partners, particularly the three companies discussed in this article, is being touted as having the potential to have the lowest-cost LNG production in the world once the entire project is up and running from production to liquefaction.
Now what: Unless you're interested in owning Oil Search, InterOil investors are probably best served to move on. There's not a lot of upside tied to the Elk-Antelope field certification, considering that all three companies involved in this deal are working together on that field already and the size of the reserves is well established.
If, however, you have held InterOil shares for less than a year in a taxable account and will profit from this big increase, it may be worth holding out until the deal closes later this year.
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