Most of the talk about natural gas these days takes the form of heady pronouncements about the US “shale boom” and the energy independence that is its predicted outcome.
Be that as it may, plenty of offshore drilling is still going on as well. In the South Pacific nation of Papua New Guinea ExxonMobil (XOM) , for instance, has been drilling and pumping gas for a long time. But they won't be the only supermajor on the island for very long, after the Dec. 5 announcement that French giant Total SA (TOT) would be purchasing a large stake in US downstream company InterOil Corp.'s (IOC) Elk and Antelope fields for between $1.5 billion and $3.5 billion
InterOil's license covering the Elk and Antelope fields in Papua New Guinea is thought to hold, at the most generous of estimates, 10.85 trillion cubic feet, and about half of that at the more consvative estimates. But this story is as old as InterOil itself, a company created from the ashes of the Enron demise in 2005.
Papua New Guinea is InterOil's only real play with any prospects. The company got its start when founding and former CEO Phil Mulacek dismantled and imported an old refinery from Nothern Alaska over to the island. For the time being, most of its revenue comes from processing the oil of other companies operating in the area, though it has for years been hyping the massive PNG discovery, described either as the biggest in recent decades to be made in Asia, and as a complete fraud, a boondoggle with little to none of the massive gas deposits that have been promised.
The company is controversial and polarizing, and the deal with Total does not seem to have put to rest much of the contentiousness surrounding it. Indeed, the day of the announcement, InterOil's stock dropped nearly 40 percent by the closing bell, and has been highly volatile since then, with price movements of ten percent in either direction on a regular basis.
What the Bulls Say
The signing of the deal with Total is a win for InterOil for a number of reasons.
First and foremost, it bolster’s the company’s credibility with prospective investors. InterOil has been singing the praises of its Papua New Guinea project for about a decade at this point, with former CEO Phil Mulacek famously claiming from the outset that not moving ahead with drilling would be similar to “trying to stop the Mississippi”. Since that time, however, there has been a great deal more talk than results, leading to a growing chorus of skepticism. The deal announced on Dec. 5 can be interpreted as a signal that one of the world’s major players sees legitimate reason to be involved.
Furthermore, the $3 billion InterOil owns nearly 4 million acres in Papua New Guinea but has fared poorly in its efforts to locate the sweet spots. Total, for its part, has long experience operating offshore drilling projects, as well as the deep pockets necessary to fund this kind of work.
Total’s cash will also be necessary if any of the gas from the Elk or Antelope fields is ever to find its way to the market, because as things currently stand InterOil has no transport facility in the country. If the first development pans out the way the company would like it to, the agreement stipulates that Total would then have the option to work on InterOil’s other licenses in the area, another plus.
What the Bears Say
The deal with Total was the result of InterOil’s four-year search for a larger partner with whom to work in Papua New Guinea. Perhaps for this reason, the company allowed the French supermajor to snatch up just over 61 percent of the particular license that covers the much-vaunted Elk and Antelope plays.
While this can be taken as a signal of Total’s seriousness about the project, it also indicates that the oil giant will probably be calling most of the shots from here on out, and will have the final say in decisions about where, when, or if to drill, and whether or not to build the LNG transport facility.
Total seems to be approaching the situation with caution, as it has requested that three appraisal wells be drilled so that they might make their own assessments about how much gas is actually recoverable. The appraisal process is not scheduled to be complete until sometime in 2015, and if the company decides to go ahead with the drilling and eventual facility, this work won’t even begin until 2016. This means that InterOil’s only significant assets are now mostly in the hands of a much larger company, and one whose own assets are vastly more diversified.
These considerations also cast some doubt about the structure of the deal itself, as well as the fact that Total, whose name had rarely been mentioned over the last four years of InterOil’s search for a partner, suddenly emerged as the buyer at the last minute.
This is especially curious because up until the beginning of December, it was widely thought that InterOil was working on a deal with ExxonMobil (XOM) , who already has its own transport facility in Papua New Guinea up and running. Total was never mentioned in the running over the last few months of speculation, though other majors like Royal Dutch Shell ($RDS.A) and BP (BP) were. Furthermore, at $613 million, the French company is paying very little up front for the supposedly largest Asian offshore discovery in decades. However much gas is eventually found, it won't be getting pumped any time soon and InterOil won't be seeing much more money until then.
Regardless how this situation pans out, it's worth mentioning that InterOil is a nearly $3 billion company, whose stock is trading for almost $60 per share, and at a ridiculously high price multiple of 201, all because of the promise of this natural gas field in Papua New Guinea that, for all its promise, has not produced anything of significance over the last several years. Until investors see some actual production, InterOil's stock seems doomed to be the play-thing of traders and speculators.