Petro River Oil Corp. (PTRC)

[Gulfam]

InterOil: An Object Lesson For Shareholder Exits

By Mitchell Posner

For years, InterOil (NYSE: IOC) wasn’t taken seriously as an E&P company. The business press used words like “fluky.” It’s now a mainstream LNG producer, and has provided a considerable return for its shareholders.

Last week, the company announced that Oil Search will acquire InterOil, exchanging 8.05 shares for each share of InterOil, about $40.25 per share[1] in U.S. dollars. The offer is valued at approximately $2.2 billion, per the announcement.

But wait, there’s more: IOC shareholders will be paid an additional $6.05 USD per share—in cash—for each tcfe[2] of hydrocarbons over the 6.2 tcfe contained in the company’s interest in the Elk-Antelope fields.

Investors in E&P companies—experts and novices alike—should and do ask, “What’s the upside?” For many companies the answer has grown vague in the current low-price environment.

Old-school thinking on exit strategy is often inconsistent: sell when the asset attains a certain amount of PDP[3]’s. Sell when production reaches a set level, or something much cloudier, like a reserve estimate. “Flipping” acreage will always exist, but suitable assets for such a play are declining.

Treadstone Energy CEO and Founder Frank McCorkle describes three basic exit ramps[4]:

A complete sale. No explanation needed, but likely buyers would be large independents or majors, or companies with private equity backing seeking an eventual IPO.

Partial exits come in two flavors: one, a joint venture in which the original E&P company steps back and becomes a non-operating partner, and another, in which a joint venture partner provides the capital and the original E&P continues to explore and develop the assets.

A more complex extended exit allows the E&P to sell some of its PDP assets on scheduled and agreed terms. In some cases the company may be recapitalized, providing funds for further development in the hope of larger payout down the road, possibly through an IPO.

While E&P’s can’t control market conditions or the oil/gas price, in practice, key determinants include management capabilities and the corporate objectives. Some are better at simple acquisition and divestment; other companies may be better suited to delineating a target prior to exit. Several have the technical know-how, 3D seismic database and capital to optimize production on their own, which increases their leverage when negotiating a payout.

One such firm is Petro River Oil (OTBB:PTRC). Management includes Stephen Brunner, who formerly served as president and CEO of Constellation Energy Partners and EVP of Pogo Producing Company. Chief Geophysical Advisor James Rector, Ph.D. is Professor of Geophysics, UC Berkeley, Senior Consultant to Chevron BP and Baker Hughes and a leading authority on seismic. Technical team members each have more than 30 years of industry experience.

Full article here