This Oil Company Got Exactly What It Needed

For a couple of months now, we've been anticipating an annoucement from InterOil to see whom it will select as its operations partner. Well, based on what ExxonMobil has said recently, it appears that our wait is just about over.

Exxon has just announced that it's in exclusive talks with InterOil and its partner Pacific LNG Group to purchase a working interest in InterOil's Elk and Antelope fields. The deal would also involve selling some of the gas at these fields to Exxon's LNG export terminal that's currently under construction and is expected to make its first shipments in 2014. The deal is not yet completed and will need to receive approval of the Papua New Guinea government.

Unlocking potential
For quite some time now, InterOil has been one of the most undervalued energy plays on the market. Based the company's net recoverable reserves, the company is currently valued at about $1.17 per thousand cubic feet equivalent of natural gas. One of the biggest reasons investors have shied away from the company is the risk involved. For years the company has been using cash flows from its modest-sized refinery and downstream and marketing operations to fund its upstream natural gas development. Without adequate pipeline installations and an export terminal, most of these wells have been drilled, tested, and shut in until its own LNG facility is online.

Another element working in the favor of InterOil is its location. Not only is China a major LNG importer, but shipments from Papua New Guinea could also bypass the Strait of Malacca, one of the world's most significant oil transit bottlenecks. The strait that separates Indonesia and Singapore sees oil volumes of about 15 million barrels per day and is a high-risk zone for potential spills, groundings, and hijackings. Any Asian market supplier that doesn't need to use this channel is in high demand, because it eases any supply shortages if anything were to happen there.

Happy to be stuck with you
As per the Papua New Guinea government's demands, the company would need to find an operational partner for the LNG facility, one that has a history of LNG exports. With so much of the company's future hinged on the LNG export terminal, the possibility that the terminal wouldn't get past government approval would have left InterOil dead in the water. This is what makes the potential ExxonMobil deal so critical. It's hard to find an oil company with as deep of pockets and as much experience as Exxon, so InterOil's partnership with the oil giant should be more than enough assurance for the government.

Another added benefit of teaming up with Exxon is that it already has an LNG facility in the works and has contracts to supply Sinopec and PetroChina's state-run parent company, CNPC. The facility will be capable of processing approximately 1 billion cubic feet of natural gas per day. So rather than having to wait until InterOil's facility gets built -- it wouldn't go online for several years -- InterOil will be able to put all those natural gas reserves to work much sooner. That will give InterOil a nice revenue boost, and provides it some more options regarding its own facility. If the Exxon facility doesn't prove to be enough export capacity, the current deal Exxon is proposing would still allow InterOil to pursue its own LNG export terminal as well.

What a Fool believes
While we've been anticipating news like this for some time now, it looks as though InterOil has found the perfect partner. Overall, bringing on Exxon as a potential partner would considerably lower the risks associated with an InterOil investment.

One item investors should look at once the deal goes through is the interest stake Exxon will take in InterOil's upstream operations. As mentioned earlier, InterOil's current market value is trading at a deep discount to several other players in the oil and gas space, so it will be interesting to see how much money Exxon will be willing to pay. The overall structure of the deal seems to be solid for InterOil, but the devil could be in the details.

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The article This Oil Company Got Exactly What It Needed originally appeared on Fool.com.

Fool contributor Tyler Crowe has no position in any stocks mentioned. You can follow him at Fool.com under the handle TMFDirtyBird, on Google +, or on Twitter, @TylerCroweFool. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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