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Implications of Gial's Interest in IOC. writer Thomas Noble instablog part of Seeking Alpha.Implications of GAIL‘s interest in InterOil (IOC) 0 comments Mar 23, 2010 07:26 AM | about stocks: IOC Font: PrintEmail Recommend 1 Share this page Share0 GAIL, India’s largest gas transmission and marketing company, indicated its interest in acquiring a stake in Interoil’s LNG project and associated resources from Elk/Antelope, and acknowledged that it’s in talks to consummate a transaction (http://www.reuters.com/article/idUSSGE62L0CW20100322?type=marketsNews ). Beyond the obvious implications, one interesting element of GAIL Chairman B.C. Tripathi’s commentary is the lack of any mention of interest in unconventional gas (especially Australian CSG). The liquids rich conventional gas that InterOil owns is cheap to produce, high in calorific value, and more compatible with markets like Japan and Korea, where utilities’ infrastructure is designed to use high btu gas. Even in Australia, there’s a clear pattern transpiring in which the preference for conventional gas has led to contracts for Gorgon and Wheatstone, while unconventional gas projects have found it more difficult to attract Tier 1 buyers. Tokyo Electric and Osaka Gas, for example, were reported in LNG Intelligence last September as having little interest in CSG. ConocoPhillips’ Australian operation president Joe Marushack acknowledged last year that CSG’s lower calorific content was likely to negatively impact the prices that its Gladstone LNG JV could attract for its gas. GAIL has a growing petrochemicals business for which it needs rich gas with LPGs (LPG includes propane, butane, ethane, etc…) as a feedstock. While InterOil’s gas contains the high liquids content that the petrochemicals industry needs, Australia’s CSG does not. Hence it’s not a surprise that India is seeking offtake agreements with Qatar and InterOil rather than Australian CSG players. Even Qatar is at risk of descending LPG production, as it has been stripping LPGs from its gas, leaving it with leaner natural gas resources and less feedstock to provide to the petrochemicals industry. Hence InterOil is in a very unique position. Not only is there a widening contracted LNG supply deficiency beginning mid-decade, but also there’s a very limited number of viable conventional natural gas projects in which to invest and secure offtake agreements. Nigeria was specifically mentioned as another potential investment opportunity by GAIL’s Chairman, but the problems plaguing the country make it a precarious source of supply. Nigeria currently has LNG capacity in excess of 20 MTPA, but its supply has fallen significantly below nameplate capacity as a result of production issues. Also, uncertainty about the country’s regulatory framework and NNPC’s (Nigerian National Petroleum Corporation – its national oil company) constricted financial capacity has called into question the viability of new projects. In conclusion, the attributes of InterOil’s project (including conventional gas, exceedingly low production and F&D costs, a low cost project plan, government project approval, a stable government with a benign fiscal policy, resource rich in condensates and LPGs, 5-6% CO2) make it a top prospect in the global competition to attract equity investments and offtake agreements. Tripathi’s commentary is strong evidence of buyers’ differentiation between compelling conventional gas projects and CSG projects, which implies that the probability of InterOil’s striking a deal for its molecules is much higher than that being ascribed by the market. Also, the timeline risk associated with Australian CSG projects is highly uncertain due primarily to environmental issues (http://www.brisbanetimes.com.au/business/farmers-wonder-if-lng-is-worth-its-salt-20100207-nkvr.html ) I believe that Elk/Antelope is worth several hundred dollars per share, implying that the market is contemplating only a tiny probability that InterOil will be successful in monetizing its resource. I also think that GAIL is facing fierce competition to invest in InterOil’s project, and I anticipate successful bidders to pay full prices for InterOil’s unique resource. Disclosure: Long IOC common stock, long IOC call options Themes: LNG Stocks: IOC |
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