InterOil Announces Second Quarter Financial and Operating Results

CAIRNS, Australia and HOUSTON, Aug. 16 /PRNewswire-FirstCall/ -- InterOil Corporation (NYSE: IOC) (POMSoX:IOC) today announced financial and operating results for the second quarter ended June 30, 2010.

Second Quarter 2010 Highlights and Recent Developments

• Balance sheet and liquidity remain strong with cash, cash equivalents and cash restricted of $50.9 million as at June 30, 2010
• The refinery and distribution operating businesses generated EBITDA, a non-GAAP measure, of $24.0 million during the quarter, more than offsetting expenditures from the developing upstream and liquefaction businesses, resulting in a net $14.9 million in EBITDA on a consolidated basis.
• The Antelope 2 horizontal well confirmed a higher condensate-to-natural gas ratio of 20.4 barrels per million cubic feet of natural gas, 27% higher than observed at the top of the reservoir.  The horizontal well also demonstrated dolomitization and higher porosity deeper in the reservoir than previously modeled.
• Subsequent to the quarter, on August 4, 2010, the Joint Venture Operating Agreement ("JVOA") for the proposed Condensate Stripping Plant (CSP) was finalized with Mitsui & Co. Ltd., along with an option deed to acquire up to 5% of the Elk and Antelope fields at the same price as an industry partner.
• On August 11, 2010, the Company closed on a $25 million secured term loan bearing a 10% interest rate with Clarion Finanz AG to maintain financial flexibility and further develop the Elk and Antelope fields while negotiating with potential industry partners.  

InterOil Chief Executive Officer Phil Mulacek commented, "We are pleased that our forward momentum has been sustained well into 2010. Our delineation drilling results continue to demonstrate the value of our reservoir at Antelope 2, and the finalization of the JVOA with Mitsui & Co. is another step in our strategy to monetize our liquid resources at the Elk and Antelope fields.  These accomplishments, combined with our strong balance sheet and the financing we have in place, will enable us to support our continued growth and operational success."

Corporate Financial Results

InterOil recorded a net profit for the first quarter ended June 30, 2010 of $7.8 million, compared with a net profit of $9.4 million for the same period in 2009, a $1.8 million reduction compared to the equivalent quarter in the prior year primarily to due to a net loss in the Upstream and Midstream Liquefaction development segments that was higher than the year-ago quarter.  The Corporate, Midstream - Refining and Downstream operating segments collectively derived a net profit for the quarter of $17.6 million, while the Upstream and Midstream Liquefaction development segments had a net loss of $8.3 million primarily due to higher exploration expenses, for an aggregate net profit of $7.8 million.

InterOil's earnings before interest, taxes, depreciation and amortization ("EBITDA") for the quarter ended June 30, 2010 was $14.9 million, compared with $17.9 million in the same quarter of 2009, a reduction of $3.0 million.  Sales and operating revenue increased by $76.9 million from $148.5 million in the quarter ended June 30, 2009 to $225.3 million in the quarter ended June 30, 2010.  

Business Segment Results

Upstream - During the quarter, InterOil continued with drilling and logging of the Antelope 2 horizontal well, and performed two separate tests.  The deeper of the two confirmed an increasing condensate-to-natural gas ratio ("CGR") of 20.4 barrels per million cubic feet of natural gas, 27% higher than observed at the top of the reservoir.  The horizontal well also demonstrated dolomitization and higher porosity deeper in the reservoir than previously modelled.

Processing and interpretation of the development seismic acquired in the first quarter over the Antelope structure was completed during the second quarter. Seismic interpretation and reservoir geophysical studies are well advanced. Additionally, the Company conducted a joint program with LNG Energy for a 27 km line that has been acquired in an area of mutual interest and subsequent to quarter end the processing of this data was completed. Furthermore, seismic acquisition of 20 km on the Wolverine prospect and another 20 km on the Bwata prospect was initiated during the second quarter and has now been completed. The seismic program is designed to prioritize our exploration inventory in time for deployment of our newly-acquired second drilling rig. The rig was shipped from New Zealand and is currently at InterOil's facilities in Napa Napa where it is being prepared for jungle operations.

The definition phase ("Pre-FEED") for the proposed CSP has been completed, and on April 15, 2010 InterOil entered into a preliminary works joint venture and preliminary works financing agreement with Mitsui & Co. to commence Front-End Engineering and Design ("FEED") work on the CSP with Final Investment Decision ("FID") expected by first quarter 2011. On August 4, 2010, the Joint Venture Operating Agreement ("JVOA") for the proposed CSP was finalized with Mitsui & Co.

InterOil's Upstream business generated a net loss of $7.9 million in the second quarter of 2010 compared to a loss of $2.4 million in the comparable quarter a year ago. The widened loss was mainly due to higher exploration costs during current periods due to the seismic acquisition over the Wolverine and Bwata prospects which are expensed as incurred under the successful efforts method of accounting, increased office and administrative as well as interest expenses, in addition to higher consulting costs related to the asset sale process underway.

Midstream Refining – Total refinery throughput for the quarter ended June 30, 2010 was 23,120 barrels per operating day, compared with 21,574 barrels per operating day for the same period of 2009.  Capacity utilization for the quarter, based on 36,500 barrels per day operating capacity, was 63% compared with 39% in the same quarter of 2009.

The Company's Midstream Refining operations generated a net profit of $12.1 million versus a profit of $9.6 million in the same quarter of the prior year. The $2.5 million positive variance is largely due to the $12.4 million positive impact of improvement in refining crack spreads.  This positive improvement was offset by an increase in non-cash foreign exchange losses of $10.4 million caused by movements of the PNG Kina against the US Dollar.

Midstream Liquefaction – InterOil continued the program to sell a portion of its interests in its Elk and Antelope fields, and in the proposed Midstream Liquefaction (LNG) plant to underpin the commercialization of its gas resources.

The Company's Midstream Liquefaction business generated a loss of $0.4 million in the 2010 second quarter compared with a loss of $1.8 million in the same period a year ago. Since the execution of the LNG Project Agreement with the Independent State of Papua New Guinea in December 2009, all LNG project related direct costs have been capitalized other than overheads and other costs that are incurred in the normal course of running the business, which costs are expensed.

Downstream - Total Downstream sales volumes for the second quarter 2010 were 145.6 million liters compared with 140.8 million liters for the second quarter in 2009.  During the quarter ended June 30, 2010, InterOil finalized a supply contract renewal agreement for a two-year term with estimated volume in excess of 100.0 million liters per year.  

InterOil's Downstream operations generated a net profit of $3.7 million in the 2010 second quarter, an improvement of $2.0 million versus a profit of $1.7 million in the second quarter of 2009. The positive variance was largely due to the increase in volumes for the quarter and an increase in and the positive effect of product price movements as applied to the inventory sold during the period.

The Corporate segment generated a second quarter net profit of $1.8 million in 2010, compared to a   loss of $0.7 million in the 2009 quarter, primarily caused by reduced interest expenses due to mandatory conversion in June 2009 on the remaining portion of the $95.0 million debentures issued in May 2008.

Summary of Consolidated Quarterly Financial Results for Past Eight Quarters

Balance Sheet and Liquidity

InterOil closed the first quarter of 2010 with cash, cash equivalents and cash restricted totalling $50.9 million as at June 30, 2010 (June 2009 - $110.9 million), of which $19.2 million is restricted (March 2009 - $14.5 million).  We also had working capital facilities in the aggregate of $236.8 million, with $86.5 million available for use in our Midstream Refining operations, and $39.8 million available for use in our Downstream operations.

Our debt-to-capital ratio (long term debt/(shareholders' equity + long term debt)) was reduced to 10% in June 2010 from 13% in June 2009.  This reduction in gearing was mainly due to principal payments of $9.0 million on the OPIC secured loan.

Summary of Debt Facilities

Summarized below are the debt facilities available to us and the balances outstanding as at June 30, 2010.

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 United States or Canadian generally accepted accounting principles 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 measure, to EBITDA, a non-GAAP measure for each of the last eight quarters.

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 on a site adjacent to InterOil's refinery in Port Moresby, Papua New Guinea.

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

Cautionary Statements

Forward Looking Statements

This press release may include "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 anticipated financial conditions and performance, business prospects, strategies, regulatory developments, the ability to attract joint venture partners, future hydrocarbon commodity prices, the ability to obtain equipment in a timely manner to carry out development activities, the ability to market products successfully to current and new customers, the effects from increasing competition, the ability to obtain financing on acceptable terms, and the ability to develop reserves and production through development and exploration activities.. Statements relating to 'resources' are forward looking, as they involve the applied assessment, based on certain estimates and assumptions, that the resources described exist in the quantities estimated. These statements are based on certain assumptions made by the Company based on its experience and perception of current conditions, expected future developments 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 SEDAR, including but not limited to those in the Company's Annual Report for the year ended December 31, 2009 on Form 40-F and its Annual Information Form for the year ended December 31, 2009. 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.

The United States Securities and Exchange Commission permits oil and gas companies, in their filings with the SEC, to disclose only proved, probable and possible reserves. We include in this press release resource estimates other than proved reserves, that the SEC's guidelines strictly prohibit us from including in filings with the SEC.

SOURCE InterOil Corporation