InterOil Announces 2012 First Quarter Financial and Operating Results

PORT MORESBY, Papua New Guinea and HOUSTON, May 14, 2012 /PRNewswire/ -- InterOil Corporation (NYSE: IOC) (POMSoX: IOC) today announced financial and operating results for the first quarter ended March 31, 2012.

First Quarter 2012 Highlights and Recent Developments

• As of April 6, 2012, InterOil drilled the Triceratops-2 well in Papua New Guinea through the entire carbonate interval to a total depth of 7,336 feet (2,236 meters).  The acquisition of wireline logs was completed on April 14, 2012 and the testing program is ongoing. The logs and DST pressure data indicate two separate, carbonate reservoir intervals with separate pressure systems and potentially separate or stacked hydrocarbon pay. The upper reservoir interval contains gas and condensate which preliminary pressure data indicates is in communication with the gas and condensate tested 3.8 kilometers away in the Bwata-1 well. The deeper zone lies below a 264 feet (80.5 meter) thick marl and argillaceous limestone interval, likely an intra-formational seal, where an independent formation evaluation indicates potential liquid hydrocarbons.  The presence of movable hydrocarbons in the lower reservoir interval, at this stage, has not been confirmed with testing.  However, a small volume of light oil of condensate composition was recovered.
• Net profit for the quarter ended March 31, 2012 was $9.4 million.  The operating segments of Corporate, Midstream Refining and Downstream collectively derived a net profit for the quarter of $28.6 million, while the investments in the development segments of Upstream and Midstream Liquefaction resulted in a net loss of $19.2 million.
• Subsequent to quarter end, InterOil signed a binding Heads of Agreement with Pacific Rubiales Energy Corp. ("PRE") to be able to earn a 10.0% net (12.9% gross) participating interest in PPL237, which includes the Triceratops structure. The transaction contemplates staged initial cash payments totaling $116.0 million, an additional carry of 25% of the costs of an agreed exploration work program, and a final resource payment. PRE has paid the initial $20 million of the staged cash payments. Definitive agreements are in the process of being finalized.

InterOil's Chief Executive Officer Phil Mulacek commented, "We are pleased to report another successful quarter of profitability from our operating business. Additionally, we are excited to welcome Pacific Rubiales as partners in PPL 237, the company brings valuable expertise to our team."

In regards to the ongoing LNG partnering process, Mr. Mulacek stated "We are continuing to work with our advisors to obtain a strategic partner. We have received conforming and non-conforming bids for the LNG partnering and sell down of an interest in the Elk and Antelope fields that we believe would be accretive to shareholders. We are now set to engage with a shortlist of significant LNG industry participants with a view to concluding discussions and entering into an agreement this quarter. The end result of the partnering process is envisioned to fully satisfy all the terms of the 2009 LNG Project Agreement."

As to the Triceratops-2 well, Mr. Mulacek noted that, "Despite mechanical difficulties in obtaining a successful drill stem test from zones of interest in the lower hydrocarbon interval, we are very encouraged by gas and liquid hydrocarbon testing ongoing at the Triceratops-2 well.  A plan is in place to evaluate the entire drilled interval and would likely include casing the entire interval and perforating zones of interest to obtain definitive results.  Our prospect inventory is maturing and we anticipate that it will support our goal of a multi-year, multi-well exploration program.  We believe that these achievements, combined with our strong balance sheet, support our continued growth and operational success."

Corporate Financial Results

Net profit for the quarter ended March 31, 2012 was $9.4 million compared with a net profit of $0.7 million for the same period in 2011, an improvement of $8.7 million.  The operating segments of Corporate, Midstream Refining and Downstream collectively derived a net profit for the quarter of $28.6 million, while investments in the development segments of Upstream and Midstream Liquefaction resulted in a net loss of $19.2 million.

Earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarter ended March 31, 2012 was $27.5 million, an increase of $9.4 million over EBITDA of $18.1 million for the same period in 2011.

Total revenues for the quarter ended March 31, 2012 were $338.2 million compared with $243.7 million for the same period in 2011.  This increase in the quarter ended March 31, 2012 compared to the same period in 2011 was due to the higher crude oil prices in the 2012 quarter and an increase in domestic volumes of product sold.  The total volume of all products sold by us was 2.2 million barrels for the quarter ended March 31, 2012, compared with 1.8 million barrels in the same quarter of 2011.

Business Segment Results as of March 31, 2012

Upstream - On January 15, 2012, we spudded the Triceratops-2 appraisal well in PPL 237 in Papua New Guinea.  The Triceratops-2 well, located approximately 3.8 kilometers west of the Bwata 1 discovery well and 4.7 kilometers southwest from Triceratops 1, was predicted to penetrate the top of the carbonate reservoir approximately 1,500 feet higher than the gas water contact established in the Bwata-1 well. The primary objectives for drilling the Triceratops-2 well are to confirm the presence of gas and condensate, test for the presence of reefal carbonate reservoir, and, in the event of success, complete the well as a future production well.  As of April 6, 2012, we had drilled the entire reservoir interval with a total depth of 2,236 meters.  The acquisition of wireline logs was completed on April 14, 2012 and the testing program has commenced.

During the quarter ended March 31, 2012, we completed over 128 kilometers of seismic acquisition evaluating the Triceratops gas field.  At the end of the quarter, the acquisition and processing of the Kwalaha and Tuna seismic dip lines in northern PPL236 and southeastern PPL238 was complete.  The interpretation of the lines is currently in progress.  Line clearing, bridging and surveying of the Kwalaha and Tuna strike lines acquisition programs were in progress.  The acquisition of these lines was completed in May.

Subsequent to quarter end, InterOil signed a binding Heads of Agreement with PRE for PRE to be able to earn a 10.0% net (12.9% gross) participating interest in PPL237 onshore Papua New Guinea, including the Triceratops structure located within that license.  The transaction contemplates staged initial cash payments totaling $116.0 million, an additional carry of 25% of the costs of an agreed exploration work program, and a final resource payment.  PRE has paid the initial $20 million of the staged cash payments.  PRE's gross participating interest will be subject to the Government of Papua New Guinea's back-in rights provided for in relevant PNG legislation.  The farm-in is subject to the accomplishment of certain milestones occurring at various stages over the coming months, including finalization and execution of definitive agreements and acceptance of registration of the assignment documents by the Government of Papua New Guinea, together with other standard industry conditions.  In the event that these milestones are not reached, the Heads of Agreement will expire and any amounts paid to InterOil by PRE are to be refunded.

As part of the sell down process being continued with our advisors led by Morgan Stanley & Company LLC, Macquarie Capital (USA) Inc. and UBS AG, we are looking to sell down a portion of our interest in Elk and Antelope fields and other prospecting licenses, in addition to selection of an LNG operator and sell down of our interests in the LNG project.  The transaction with PRE noted above, is in addition to the planned sale of an interest in the Elk and Antelope fields and related LNG equity partnering process targeted for the second quarter of 2012.

InterOil's Upstream business realized a net loss of $17.2 million in the first quarter of 2012 compared to a loss of $17.9 million in the comparable period a year ago. The decrease in the loss in 2012 was mainly due to a reduction in office and administration expenses as the result of higher capitalization of expenses due to ongoing drilling activities during the quarter which were partially offset by higher interest expense due to an increase in inter-company loan balances provided to fund exploration and development activities.

Midstream Refining – Total refinery throughput for the quarter ended March 31, 2012, was 23,759 barrels per operating day, compared with 27,643 barrels per operating day during quarter ended March 31, 2011.

Capacity utilization of the refinery for the quarter ended March 31, 2012, based on 36,500 barrels per day operating capacity, was 55% compared with 58% for the same quarter in 2011.  During the quarters ended March 31, 2012 and 2011, our refinery was shut down for 15 days and 21 days respectively for general maintenance.

The Company's Midstream Refining operations generated a net profit of $11.3 million in in the first quarter of 2012 versus a profit of $14.9 million in the prior year period. The $3.6 million negative variance is largely due to decreases in export product crack spreads which were partially offset by decreased income tax expense related to foreign exchange movements.

Midstream Liquefaction – Our advisors continued working on bid process to select an LNG operator for the Gulf LNG Project and sell down.  InterOil has received conforming and non-conforming bids that it believes would be accretive to shareholders for the LNG partnering and sell down of an interest in the Elk and Antelope fields. InterOil is now set to engage with a shortlist of significant LNG industry participants with a view to concluding discussions and entering into an agreement this quarter. The selection of the preferred bidder is targeted for the second quarter of 2012.

During the quarter ended March 31, 2012, we continued to progress the development of our LNG Project by completing front end engineering and design ("FEED") for our proposed field gathering system, condensate stripping plant (CSP) and pipeline to the proposed liquefaction facilities site on the coast. FEED on the liquefaction facilities to meet the 2009 LNG Project Agreement is underway. In respect to the planned CSP, bids have been received, evaluated and are in the process of being finalized. The pipeline bids have been received and are currently being evaluated. Designs for the marine loading and export facility and common works have been finalized and are currently out for tender.

The Company's Midstream Liquefaction business generated a loss of $2.0 million in the first quarter of 2012 compared with a loss of $2.6 million in the same period a year ago. The positive variance is largely due to a decrease in office, administration and other expenses for the period resulting from lower management expenses and share compensation costs which are not capitalized.

Downstream - Total Downstream sales volumes for the quarter ended March 31, 2012, were 188.9 million liters, an increase of 24.3 million liters, or 14.8% over the same quarter in 2011.

The PNG economy continues to grow strongly due largely to resource development projects, which has also led to growth in our aviation and retail business segments.

InterOil continues to develop its retail business with investments in new electronic systems for both pumps and the forecourt control units and the completion of one new service station and the purchase of one existing key site that was previously leased. In line with its strategic plan, the Company intends to open one further new retail site this year and commence development of a further two sites.

InterOil's Downstream operations generated a net profit of $13.2 million in the first quarter of 2012, an improvement of $8.7 million versus a profit of $4.5 million in the previous year.  The positive variance is largely due to an increase in domestic sales, higher commodity prices and increased foreign exchange gains, which were partially offset by increased income tax expense.

Corporate – The Corporate segment generated a net profit of $6.3 million in the first quarter of 2012, compared to a net profit of $3.5 million in the same period of 2011. The positive variance is largely the result of higher interest income due to an increase in inter-company loan balances.

Summary of Consolidated Quarterly Financial Results for Past Eight Quarters

Balance Sheet and Liquidity

InterOil closed the first quarter ended March 31, 2012 with cash, cash equivalents and cash restricted totaling $81.4 million (March 31, 2011 - $274.5 million), of which $41.3 million is restricted (March 31, 2011 - $42.2 million).

We also had aggregate working capital facilities of $307.5 million, with $83.1 million available for use in our Midstream Refining operations, and $47.3 million available for use in our Downstream operations.

The Company is managing its gearing levels by maintaining the debt-to-capital ratio (debt/(shareholders' equity + debt)) at 50% or less.  Our debt-to-capital ratio was 13% as of March 31, 2012 unchanged from 13% as of March 31, 2011.

Summary of Debt Facilities

Summarized below are the debt facilities available to us and the balances outstanding as at March 31, 2012.

NON-GAAP EBITDA Reconciliation

EBITDA represents our net income/(loss) plus total interest expense (excluding amortization of debt issuance costs), income tax expense, depreciation and amortization expense.  EBITDA is used by us to analyze operating performance.  EBITDA does not have a standardized meaning prescribed by GAAP (i.e., IFRS) and, therefore, may not be comparable with the calculation of similar measures for other companies.  The items excluded from EBITDA are significant in assessing our operating results.  Therefore, EBITDA should not be considered in isolation or as an alternative to net earnings, operating profit, net cash provided from operating activities and other measures of financial performance prepared in accordance with IFRS.  Further, EBITDA is not a measure of cash flow under IFRS and should not be considered as such.  For reconciliation of EBITDA to the net income (loss) under IFRS, refer to the following table.

The following table reconciles net income (loss), a GAAP measure, to EBITDA, a non-GAAP measure for each of the last eight quarters.

About InterOil

InterOil Corporation is developing a vertically integrated energy business whose primary focus is Papua New Guinea and the surrounding region.  InterOil's assets consist of petroleum licenses covering about 3.9 million acres, an oil refinery, and retail and commercial distribution facilities, all located in Papua New Guinea.  In addition, InterOil is a shareholder in a joint venture established to construct an LNG plant in Papua New Guinea.

InterOil's common shares trade on the NYSE in US dollars. 

Forward Looking Statements

This press release includes "forward-looking statements" as defined in United States federal and Canadian securities laws. All statements, other than statements of historical facts, included in this press release that address activities, events or developments that the InterOil expects, believes or anticipates will or may occur in the future are forward-looking statements, including in particular further testing of the Triceratops-2 well, seismic-related exploration activities, characteristics of our resources, development activities, entering into definitive agreements with PRE, the potential execution of definitive LNG supply agreements, the ability to attract a strategic LNG partner, timing and success of the LNG partnering process, satisfaction of the 2009 LNG Project Agreement with the PNG State, the construction and development of the proposed LNG Project and condensate stripping project, anticipated financial conditions and performance, business prospects, strategies, regulatory developments, the ability to obtain financing on acceptable terms, the ability to identify drilling locations and the ability to develop reserves and production through development and exploration activities. These statements are based on certain assumptions made by the Company based on its experience and perception of current conditions, expected future developments, agreements with third parties, bids received in respect of the LNG partnering process and CSP and other factors it believes are appropriate in the circumstances. No assurances can be given however, that these events will occur. Actual results will differ, and the difference may be material and adverse to the Company and its shareholders. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the Company, which may cause our actual results to differ materially from those implied or expressed by the forward-looking statements. Some of these factors include the risk factors discussed in the Company's filings with the Securities and Exchange Commission and on SEDAR, including but not limited to those in the Company's Annual Report for the year ended December 31, 2011 on Form 40-F and its Annual Information Form for the year ended December 31, 2011. In particular, there is no established market for natural gas or gas condensate in Papua New Guinea and no guarantee that gas or gas condensate from the Elk, Antelope and Triceratops fields will ultimately be able to be extracted and sold commercially.

Investors are urged to consider closely the disclosure in the Company's Form 40-F, available from us at www.interoil.com or from the SEC at www.sec.gov and its Annual Information Form available on SEDAR at www.sedar.com.

SOURCE InterOil Corporation

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