InterOil Announces Third Quarter 2011 Financial and Operating Results

PORT MORESBY, Papua New Guinea and HOUSTON, Nov. 14, 2011 /PRNewswire/ -- InterOil Corporation (NYSE: IOC) (POMSoX: IOC) today announced financial and operating results for the third quarter ended September 30, 2011.

Third Quarter 2011 Highlights and Recent Developments

• InterOil recorded a consolidated net loss for the quarter ended September 30, 2011 of $19.8 million.  The operating segments of Corporate, Midstream Refining and Downstream collectively derived a net loss for the quarter of $0.7 million, while the development segments of Upstream and Midstream Liquefaction had a collective net loss of $19.1 million.
• At the end of the quarter, we retained Morgan Stanley & Co. LLC, Macquarie Capital (USA) Inc. and UBS AG as joint financial advisors to assist us with soliciting and evaluating proposals from potential strategic partners.  We anticipate that these proposals will relate to obtaining an internationally recognized LNG operating partner for development of the Gulf LNG Project's gas liquefaction and associated facilities in the Gulf Province of Papua New Guinea, together with a sale of an interest in the Elk and Antelope fields, and in our other exploration tenements in Papua New Guinea.
• Civil works on the road between the Purari river wharf and the Elk/Antelope fields continued during the year through the third quarter, with the connection to Antelope-2 completed towards the end of the quarter.  Work now involves cleaning up, grading, strengthening bridges and surfacing of the road.
• Subsequent to the quarter end, a further phase of 50 kilometers of exploration seismic is currently underway to further delineate  identified leads in PPLs [236 and 238], which will assist us in locating our next well in these license areas which we are required to drill before the end of March 2013 in compliance with our license commitments.

InterOil Chief Executive Officer Phil Mulacek commented, "We are pleased to be working with internationally-recognized advisors to seek proposals from potential strategic partners.  While we look forward to a prompt conclusion to this process and to our discussions with the PNG Government concerning the Gulf LNG Project, we continue to pre-invest in our Gulf LNG Project and the civil works and the front-end engineering and design . We believe that the considerable strengthening of the Asian LNG market, the increased interest in exploration and investment in Papua New Guinea, as well as the Company's reservoir analysis and project design fundamentals, will yield a successful result from the partnering process. We continue to negotiate LNG offtake agreements and are working with a number of parties with this aim."

"We look forward to spudding the Triceratops 2 well and expect to do so towards the end of this fourth quarter. The phase three seismic program has improved our structural model of the prospect and increased our optimism for a successful confirmation with the drill bit. In addition, our exploration activities are maturing our prospect inventory."

Corporate Financial Results

The net loss for the quarter ended September 30, 2011 was $19.8 million compared with a net loss of $14.4 million for the same quarter of 2010, an increase in the loss of $5.4 million.  The results for the quarter ended September 30, 2011 were affected by lower gross margins of $13.4 million due to lower crack spreads on our export products during the quarter and inventory write downs due to a fall in crude and product prices at the end of the third quarter of 2011, expensed seismic costs were higher by $5.5 million compared with the prior year quarter, and the recognition of a loss on Flex LNG investment of $6.0 million due to fall in its quoted share price.  

InterOil's earnings before interest, taxes, depreciation and amortization ("EBITDA") for the quarter ended September 30, 2011 was a loss of $11.5 million, compared with a loss of $8.6 million for the same period in 2010, an increase in the loss of $2.9 million.  Total revenue increased by $73.4 million from $208.5 million in 2010 to $281.9 million for the third quarter ended September 30, 2011.

Business Segment Results

Upstream - Construction on the road between the Purari river wharf and the Elk and Antelope fields continued through the third quarter of 2011, with the connection to the Antelope-2 well completed towards the end of the quarter.  Work now involves cleaning up, grading, strengthening bridges and surfacing of the road.  During the third quarter of 2011, areas between the lay down area and the barge wharf near the Purari river were reclaimed and compacted.  The construction team commenced raising the lay down area, and the extension for the wharf in addition to civil works in the surrounding areas.

We contracted airborne magnetic, gravity and gamma ray prospecting over PPL236, PPL237 and PPL238. Five acquisition blocks were acquired for a total of 14,288.6 line kilometers of airborne data. A new airborne methane particulate detection tool was trialed over PPL238. Data processing of this airborne data is currently being undertaken.

Subsequent to the third quarter of 2011, a further phase of 50 kilometers of exploration seismic was ordered and is currently under way to further delineate identified leads, which will assist us in locating potential drilling locations in PPLs 236 and 238. We are required to drill a well on these licenses before the end of March 2013 in compliance with our license commitments.

InterOil's Upstream business realized a net loss of $15.1 million in the third quarter of 2011, compared with a net loss of $16.6 million in the comparable period a year ago. The positive variance was mainly due to the exclusion of an $8.8 million loss on extinguishment of IPI liability which was recorded in the comparable quarter of 2010 and a reduction in office and administration expenses in the current quarter.  The improvements were largely offset by higher exploration costs for seismic activity and higher interest expense due to an increase in inter-company loan balances.

Midstream Refining – Total refinery throughput for the quarter ended September 30, 2011, was 23,797 barrels per operating day, compared with 23,496 barrels per operating day during quarter ended June 30, 2011 and 27,515 barrels per operating day during quarter ended September 30, 2010. Capacity utilization of the refinery for the quarter, based on 36,500 barrels per day operating capacity, was 56% compared with 63% in same quarter of 2010. The capacity utilization of the refinery in the same quarter of 2010 was maximized to stockpile products in anticipation of an extended maintenance shutdown toward the end of the quarter.

The Company's Midstream Refining operations generated a net loss of $1.2 million in the third quarter of 2011 versus a profit of $12.0 million in the prior year. The $13.2 million negative variance is largely due to decreased crack spreads over export products and a refined products write down of $3.4 million due to price decreases at the end of September 2011.

Midstream Liquefaction – On August 3, 2011, InterOil completed another milestone in the development of its Gulf LNG Project, signing a Heads of Agreement with Noble Clean Fuels Limited, a wholly owned subsidiary of Noble Group Limited, for the supply of one mtpa of LNG from the Gulf LNG Project for a ten year period.  Definitive, binding agreements are currently being negotiated.

At the end of the quarter, InterOil retained Morgan Stanley & Co. LLC, Macquarie Capital (USA) Inc. and UBS AG as joint financial advisors to assist us with soliciting and evaluating proposals from potential strategic partners.  We anticipate that these proposals will relate to obtaining an internationally recognized LNG operating partner for development of the Gulf LNG Project's gas liquefaction and associated facilities in the Gulf Province of Papua New Guinea, together with a sale of an interest in the Elk and Antelope fields, and in our other exploration tenements in Papua New Guinea.

The Company's Midstream Liquefaction business generated a loss of $4.0 million in the third quarter of 2011 compared with a loss of $5.0 million in the same period a year ago. The positive variance resulted from a decrease in office, administration and other expenses for the quarter.

Downstream - Total Downstream sales volumes for the quarter ended September 30, 2011, were 162.5 million liters, compared with 163.2 million liters for the quarter ended June 30, 2011 and 166.6 million liters for the quarter ended September 30, 2010.  The volume of sales for this quarter was down compared with the same quarter of 2010 due to temporary mine closures for two of our mining customers during the third quarter of 2011.  However, the Papua New Guinea economy continued to remain generally buoyant over this period, driven mainly by the resource sector with the various oil, natural gas and mining projects that are being pursued in various parts of the country, together with a general flow on increase in business activity.

InterOil's Downstream operations generated a profit of $1.1 million in the third quarter of 2011, an improvement of $1.4 million versus a loss of $0.3 million in the same period a year ago.  Improved gross margins during the 2011 quarter were partially offset by increased office and administration and other expenses.

Corporate - The Corporate segment generated a net loss of $0.5 million in the quarter ended September 30, 2011 compared to a net loss of $5.4 million for the same period in 2010. Significant items in the two quarters were a $6.0 million loss recognized on the FLEX LNG investment in 2011 compared with a $12.0 million loss on litigation expense in 2010.

Summary of Consolidated Quarterly Financial Results for Past Eight Quarters

The following is a table containing the consolidated results for the eight quarters ended September 30, 2011 by business segment, and on a consolidated basis.  Our IFRS transition date was January 1, 2010. The 2010 comparative information has been stated in accordance with IFRS while 2009 comparative information has not been restated and was prepared in accordance with Canadian GAAP in operation during that year.

Balance Sheet and Liquidity

InterOil closed the third quarter of 2011 with cash, cash equivalents, and cash restricted of $144.4 million (September 2010 – $66.8 million), of which $30.1 million (September 2010 - $30.7 million) was restricted.  In addition, we also had $11.3 million equivalent of PGK in short term treasury bills issued by the Bank of Papua New Guinea.  We also had aggregate working capital facilities of $288.0 million, with $112.3 million available for use in our Midstream Refining operations, and $34.8 million available for use in Downstream operations.

As at September 30, 2011, our debt-to-capital ratio (being debt/[shareholders' equity + debt]) was 12.7% (10.0% as at September 30, 2010), well below our targeted maximum gearing level of 50%. The increase in gearing from 2010 was mainly due to the 2.75% convertible senior notes due 2015 issued in November of last year.

Summary of Debt Facilities  

Summarized below are the debt facilities available to us and the balances outstanding as at September 30, 2011.

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 analyse operating performance.  EBITDA does not have a standardized meaning prescribed by United States or Canadian GAAP 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 GAAP.  Further, EBITDA is not a measure of cash flow under GAAP and should not be considered as such.  For reconciliation of EBITDA to the net income (loss) under GAAP, refer to the following table.  

The following table reconciles net income (loss), a GAAP (i.e. IFRS) 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 soliciting and evaluating proposals from and transacting with potential LNG strategic partners, discussions with the PNG government, further seismic-related and other exploration activities, spudding of the Triceratops 2 well, the potential execution of definitive agreements with Noble Clean Fuels Ltd or other parties in relation to the proposed Gulf LNG Project and the condensate stripping, transmission and distribution projects,  progress to and achievement of Final Investment Decisions in such projects, the construction and development of the proposed LNG plants and condensate stripping plant, anticipated financial conditions and performance, business prospects, strategies, regulatory developments, the ability to obtain financing on acceptable terms, and the ability to develop and monetize our resources and production through development and exploration activities.  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, 2010 on Form 40-F and its Annual Information Form for the year ended December 31, 2010. 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 and Antelope 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 and its Annual Information Form available on SEDAR at www.sedar.com.

SOURCE InterOil Corporation

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