Form 6-K INTEROIL CORP For: Nov 14

 

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C. 20549

 

FORM 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO

RULE 13a-16 OR 15d-16 OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of November 2016

 

Commission File Number: 001-32179

 

INTEROIL CORPORATION

(Exact name of registrant as specified in its charter)

 

YUKON, CANADA

(Province or other jurisdiction of incorporation or organization)

 

163 PENANG ROAD

#06-02 WINSLAND HOUSE II

SINGAPORE 238463

(Address of principal executive offices)

 

Registrant’s telephone number, including area code: +65 6507-0222

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

 

Form 20-F ¨     Form 40-F þ

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):          

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):          

 

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes ¨     No þ

 

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):

 

  

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	INTEROIL CORPORATION
	By:	/s/ Michael Hession
		Michael Hession
		Chief Executive Officer
	Date: November 14, 2016

 

 

INTEROIL CORPORATION

FORM 6-K FOR THE MONTH OF NOVEMBER 2016

 

Exhibit Index

 

1.

Management’s Discussion and Analysis for the quarter and nine months ended September 30, 2016.

 

2.

Unaudited Condensed Consolidated Interim Financial Statements for the quarter and nine months ended September 30, 2016 and 2015.

 

 

Exhibit 1

 

InterOil Corporation Management Discussion and Analysis   For the quarter and nine months ended September 30, 2016 November 14, 2016

 

TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS	2
ABBREVIATIONS AND EQUIVALENCIES	3
CONVERSION	4
OIL AND GAS DISCLOSURES	4
GLOSSARY OF TERMS	4
INTRODUCTION	6
BUSINESS STRATEGY	6
OPERATIONAL HIGHLIGHTS	7
OVERVIEW OF THE PENDING EXXON TRANSACTION	7
SELECTED FINANCIAL INFORMATION AND HIGHLIGHTS	9
LIQUIDITY AND CAPITAL RESOURCES	15
RISK FACTORS	18
CRITICAL ACCOUNTING ESTIMATES	19
NEW ACCOUNTING STANDARDS	19
NON-GAAP MEASURES AND RECONCILIATION	19
PUBLIC SECURITIES FILINGS	20
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING	20

 

This MD&A (as defined herein) should be read in conjunction with our Condensed Consolidated Interim Financial Statements (as defined herein) and accompanying notes, our Consolidated Financial Statements (as defined herein) and our 2015 AIF (as defined herein). This MD&A was prepared by management and provides a review of our performance for the quarter and nine months ended September 30, 2016, and of our financial condition and future prospects.

 

Our financial statements and the financial information contained in this MD&A have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board applicable to the preparation of financial statements and are presented in United States dollars (“USD” or “$”) unless otherwise specified.

 

In this MD&A, references to “we,” “us,” “our,” “the Company,” and “InterOil” refer to InterOil Corporation or InterOil Corporation and its subsidiaries as the context requires. Information is presented in this MD&A as at September 30, 2016 and for the quarter and nine months ended September 30, 2016 unless otherwise specified. A listing of specific defined terms can be found in the “Glossary of Terms” section of this MD&A.

 

 

FORWARD-LOOKING STATEMENTS

 

This MD&A contains “forward-looking statements” as defined in U.S. federal and Canadian securities laws. Such statements are generally identifiable by the terminology used such as “may,” “plans,” “believes,” “expects,” “anticipates,” “intends,” “estimates,” “forecasts,” “budgets,” “targets” or other similar wording suggesting future outcomes or statements regarding an outlook. We have based these forward-looking statements on our current expectations and projections about future events. All statements, other than statements of historical fact, included in or incorporated by reference in this MD&A are forward-looking statements.

 

Forward-looking statements include, without limitation, statements regarding the pending transaction with Exxon; the timing to consummate the proposed transaction with Exxon; the ability to satisfy the conditions to consummation of the proposed transaction; our business strategies and plans; plans for and anticipated timing of our exploration and appraisal (including drilling plans) and other business activities and results therefrom; anticipated timing of certain well testing and resource certifications under the Total SSA (as defined herein); characteristics of our properties; construction and development of a proposed liquefaction plant and central processing facility in Papua New Guinea; the timing and cost of such construction and development; commercialization and monetization of any resources; whether sufficient resources will be established; the likelihood of successful exploration for gas and gas condensate or other hydrocarbons; cash flows from operations; sources of capital and its sufficiency; operating costs; contingent liabilities; environmental matters; plans and objectives for future operations; and timing, maturity and amount of future capital and other expenditures and the ability to obtain requisite financing in the future.

 

Many risks and uncertainties may affect matters addressed in these forward-looking statements, including but not limited to:

 

·

the risk that we may not be able to close the pending transaction with Exxon in accordance with the terms of the arrangement agreement;

·

uncertainties associated with the pending transaction with Exxon;

·

our financial condition may be adversely affected if there are long term declines in oil and natural gas prices;

·

the uncertainty associated with the availability, terms and deployment of capital;

·

our limited sources of revenue;

·

our ability to obtain and maintain necessary permits, concessions, licenses and approvals from relevant State (as defined herein) authorities to develop our gas and condensate resources within reasonable periods and on reasonable terms or at all;

·

inherent uncertainty of oil and gas exploration;

·

the difficulties with recruitment and retention of qualified personnel;

·

the political, legal and economic risks in Papua New Guinea;

·

landowner claims and disruption;

·

compliance with and changes in Papua New Guinean laws and regulations, including environmental laws;

·

the exploration and production businesses are competitive;

·

the inherent limitations in all control systems, and misstatements due to errors that may occur and not be detected;

·

exposure to certain uninsured risks stemming from our operations;

·

contractual defaults;

·

weather conditions and unforeseen operating hazards;

·

compliance with environmental and other government regulations could be costly and could negatively impact our business;

·

general economic conditions, including further economic downturn, availability of credit and the decline in commodity prices, including hydrocarbon commodity prices;

·

risk of legal action against us;

·

law enforcement difficulties;

·

the outcome of the resource certification process for the Elk-Antelope field as applicable to the contingent resource payment contemplated by the pending transaction with Exxon; and

·

dilution of our common shares.

 

 

Forward-looking statements and information are based on our current beliefs as well as assumptions made by, and information currently available to us concerning anticipated financial conditions and performance, business prospects, strategies, regulatory developments, the ability to attract joint venture partners, future hydrocarbon commodity prices, the ability to secure adequate capital funding, the ability to obtain equipment and qualified personnel in a timely manner to develop resources, the ability to obtain financing on acceptable terms, and the ability to develop reserves and production through development and exploration activities.

 

Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate, and, therefore, we cannot assure you that the forward-looking statements will eventuate.

 

In light of the significant uncertainties inherent in our forward-looking statements, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.

 

Some of these assumptions and other risks and uncertainties that could cause actual results to differ materially from such forward-looking statements are more fully described under the heading “Risk Factors” in our 2015 AIF and in our Management Information Circular dated August 16, 2016.

 

Further, forward-looking statements contained in this MD&A are made as of the date hereof and, except as required by applicable law, we will not update publicly or revise any of these forward-looking statements. The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement.

 

ABBREVIATIONS AND EQUIVALENCIES

 

Abbreviations

 

Crude Oil and Natural Gas Liquids			Natural Gas
bbl	one barrel equaling 34.972 Imperial gallons or 42 U.S. gallons		btu	British Thermal Units
bblspd	barrels per day		mcf	thousand standard cubic feet
boe(1)	barrels of oil equivalent		mcfpd	thousand standard cubic feet per day
boepd	barrels of oil equivalent per day		MMbtu	million British Thermal Units
bpsd	barrels per stream day		MMbtupd	million British Thermal Units per day
Mbbl	thousand barrels		MMcf	million standard cubic feet
Mboe	thousand barrels of oil equivalent		MMcfpd	million standard cubic feet per day
MMbbls	million barrels		scfpd	standard cubic feet per day
MMboe	million barrels of oil equivalent		Tcfe(2)	trillion standard cubic feet equivalent
MMstb	millions of stock tank barrels		psi	pounds per square inch
WTI	West Texas Intermediate crude oil delivered at Cushing, Oklahoma
bscf	billion standard cubic feet

 

Note:

(1)

All calculations converting natural gas to crude oil equivalent have been made using a ratio of six mcf of natural gas to one barrel of crude equivalent. Boe’s may be misleading, particularly if used in isolation. A boe conversion ratio of six mcf of natural gas to one barrel of crude oil equivalent is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

 

(2)

Tcfe’s may be misleading, particularly if used in isolation. A tcfe conversion ratio of one barrel of oil to six thousand cubic feet of gas is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

 

 

CONVERSION

 

This table outlines certain standard conversions between Standard Imperial Units and the International System of Units (metric units).

 

To Convert From		To		Multiply By
mcf		cubic meters		28.317
cubic meters		cubic feet		35.315
bbls		cubic meters		0.159
cubic meters		bbls		6.289
feet		meters		0.305
meters		feet		3.281
miles		kilometers		1.609
kilometers		miles		0.621
acres		hectares		0.405
hectares		acres		2.471

 

OIL AND GAS DISCLOSURES

 

We are required to comply with the Canadian Securities Administrators’ NI 51-101 (as defined herein), which prescribes disclosure of oil and gas reserves and resources. As at December 31, 2015 and in accordance with NI 51-101, (i) GLJ Petroleum Consultants Ltd., an independent qualified reserve evaluator based in Calgary, Canada, has evaluated our resources data for the Elk and Antelope field and Triceratops field; and (ii) RISC Operations Pty Limited, an independent qualified reserve evaluator based in Perth, Australia has evaluated our resources data for the Raptor and Bobcat fields. These evaluations are summarized in our 2015 AIF available at www.sedar.com. We do not have any production or reserves, including proved reserves, as defined under NI 51-101 or as per the guidelines set by the SEC (as defined herein), as at September 30, 2016.

 

Well flow test results are not necessarily indicative of long-term performance or of ultimate recovery.

 

The SEC permits oil and gas companies, in their filings with the SEC, to disclose only proved, possible and probable reserves that a company has demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions. We include in this MD&A information that the SEC’s guidelines generally prohibit U.S registrants from including in filings with the SEC.

 

GLOSSARY OF TERMS

 

“2015 AIF” means InterOil’s Annual Information Form for the year ended December 31, 2015.

 

“2015 MD&A” means Management’s Discussion and Analysis for the year ended December 31, 2015.

 

“ANZ” means Australia and New Zealand Banking Group Limited.

 

“ANZ Facility” means the $400.0 million senior secured capital expenditure facility on a syndicated basis arranged by ANZ as sole mandated lead arranger and book runner and entered into by the Company on April 21, 2016.

 

 

“BSP” means Bank of South Pacific Limited.

 

“Common Shares” means the common shares in the capital of the Company.

 

“condensate” means a component of natural gas which is a liquid at surface conditions.

 

“Condensed Consolidated Interim Financial Statements” means the unaudited condensed consolidated interim financial statements for the quarter and nine months ended September 30, 2016.

 

“Consolidated Financial Statements” means the audited consolidated financial statements for the years ended December 31, 2015, 2014 and 2013.

 

“Credit Suisse” means Credit Suisse A.G.

 

“Credit Suisse Facility” means the $300.0 million syndicated, senior secured capital expenditure facility entered into by the Company on June 17, 2014 through a consortium of banks led by Credit Suisse.

 

“EBITDA” represents net income/(loss) plus total interest expense (excluding amortization of debt issuance costs), income tax expense, depreciation and amortization expense. EBITDA is a non-GAAP measure used to analyze operating performance. See “Non-GAAP Measures and Reconciliation”.

 

“Exxon” means Exxon Mobil Corp., an American multinational oil and gas corporation headquartered in Irving, Texas.

 

“GAAP” means Canadian generally accepted accounting principles.

 

“gas” means a mixture of lighter hydrocarbons that exist either in the gaseous phase or in solution in crude oil in reservoirs but are gaseous at atmospheric conditions. Gas may contain sulfur or other non-hydrocarbon compounds.

 

“IFRS” means International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

“LIBOR” means daily reference rate based on the interest rates at which banks borrow unsecured funds from banks in the London, United Kingdom, wholesale money market.

 

“LNG” means liquefied natural gas.

 

“MD&A” means this Management’s Discussion and Analysis for the quarter and nine months ended September 30, 2016.

 

“NI 51-101” means National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities adopted by the Canadian Securities Administrators.

 

“Oil Search” means Oil Search Limited, a company incorporated in PNG, and its subsidiaries.

 

“Papua LNG Project” means the Elk-Antelope liquefied natural gas joint venture project operated by Total on behalf of the PRL 15 Joint Venture, which includes Total, Oil Search and us.

 

“PGK” means the kina, currency of PNG.

 

“PPL” means the Petroleum Prospecting License, an exploration tenement granted under the PNG Oil and Gas Act 1998.

 

“PRE” means Pacific Exploration and Production Corporation (formerly Pacific Rubiales Energy Corporation), a company incorporated under the laws of British Columbia, Canada.

 

 

“PRL” means the Petroleum Retention License, the tenement granted under the PNG Oil and Gas Act 1998 to allow the license holder to evaluate the commercial and technical options for the potential development of an oil and/or gas discovery.

 

“PRL 15 Joint Venture” means the current license holders in respect of PRL 15 and parties to the Elk/Antelope JVOA, dated September 26, 2013 (as amended and restated).

 

“Puma” means Puma Energy Pacific Holdings Pte Ltd.

 

“SEC” means the United States Securities and Exchange Commission.

 

“SocGen” means Société Generale Hong Kong branch.

 

“State” or “PNG” means the independent State of Papua New Guinea.

 

“Total” means Total S.A., a French multinational integrated oil and gas company and its subsidiaries.

 

“Total SSA” means the share purchase agreement under which Total acquired, through the purchase of all of the shares of SPI (200) Limited (now known as Total E&P PNG Limited), a wholly owned subsidiary, a gross 40.1275% interest in PRL 15.

 

“UBS” means UBS A.G.

 

“Westpac” means Westpac Bank PNG Limited.

 

INTRODUCTION

 

We are an independent oil and gas business with a sole focus on Papua New Guinea. Our assets include the Elk-Antelope, Triceratops, Raptor and Bobcat fields in the Gulf Province of Papua New Guinea, and exploration licenses covering about 16,000 square kilometers (about 4 million acres) in Papua New Guinea. We have our main offices in Singapore and Port Moresby. We are listed on the New York Stock Exchange and the Port Moresby Stock Exchange. At September 30, 2016, we had 85 full-time employees.  

 

On July 21, 2016, the Company and Exxon announced that they had entered into an arrangement agreement under which Exxon would acquire all of the outstanding Common Shares pursuant to a statutory plan of arrangement under the Business Corporations Act (Yukon). Refer to “Overview of the Pending Exxon Transaction” for further details.

 

BUSINESS STRATEGY

 

Our strategy is to unlock significant value to shareholders by finding oil and gas safely and competitively; enabling its development through the right partnerships, funding and project development capability; co-developing these opportunities to producing assets whilst maintaining a material interest; and repeating this process to fully exploit our acreage position. The focus areas for our strategy are to:

 

-

Continue to develop as a prudent and responsible business operator;

-

Enable our discovered resources;

-

Maximize the value of our exploration assets; and

-

Position for long-term success.

 

Further details of our business strategy can be found under the heading “Business Strategy” in our 2015 AIF available at www.sedar.com.

 

 

OPERATIONAL HIGHLIGHTS

 

Summary of operational highlights

 

A summary of the key operational matters and events for the quarter is as follows:

 

·

PRL 15 – Appraisal Program

-

On May 20, 2016, the PRL15 Joint Venture approved the drilling of a further appraisal well, Antelope-7, which spudded on November 2, 2016. Consequently, in June 2016 we adjusted the expected cash flow timing of the interim resource payment under the Total SSA from September 2016 to March 2017 to take into account the drilling of Antelope-7, and in September 2016 we further adjusted the timing from March 2017 to April 2017 to take into account the timing of the spudding of Antelope-7.

 

·

PRL15 License Extension Application

-

On May 27, 2015, the operator of the PRL15 Joint Venture, lodged an extension application with the PNG Department of Petroleum and Energy, in respect of PRL 15 which was due to expire on 29 November 2015 (the “Extension Application”). As part of the Extension Application, the PRL 15 Joint Venture proposed new work programs and commitments for the extension term.

-

The Extension Application is still being considered.  Pursuant to section 45(10) of the PNG Oil and Gas Act 1998, PRL 15 is deemed to continue in full force and effect until the Extension Application is determined.

 

·

Papua LNG Project

-

During the second and third quarters of 2016, the PRL 15 Joint Venture continued work on the compilation of the basis of design for the Papua LNG Project, supported by the results of numerous site surveys which have been completed to date. These surveys include metocean, geophysical, geotechnical, topographical and environmental surveys. The PRL 15 Joint Venture also continued discussions on LNG marketing and project financing for development of the Papua LNG Project.

 

OVERVIEW OF THE PENDING EXXON TRANSACTION

 

On July 21, 2016, the Company and Exxon announced that they had entered into an arrangement agreement under which Exxon agreed to acquire all of the outstanding Common Shares. Under the terms of the transaction, holders of Common Shares would receive, in exchange for each Common Share (including each Common Share issued to holders of restricted share units pursuant to the transaction):

 

·

US$45.00 of shares of Exxon, calculated based on the volume weighted average price of Exxon’s shares on the New York Stock Exchange for the ten (10) consecutive trading days ending on the second trading date immediately prior to closing of the transaction; and

 

·

the right to receive a contingent resource payment equal to an additional cash payment of $7.07 per Common Share for each tcfe gross resources certification of the Elk-Antelope field above 6.2 tcfe, up to a maximum of 10 tcfe.

 

On September 21, 2016, our shareholders, stock option holders and restricted stock unit holders voted to approve the transaction. The transaction also required approval by the Supreme Court of Yukon and, on October 7, 2016, the Supreme Court of Yukon approved the transaction with Exxon. Subsequent to such approval, a shareholder, Mr. Phil Mulacek, filed a notice of appeal. On November 4, 2016, the Court of Appeal of Yukon upheld the appeal and overturned the Supreme Court of Yukon’s approval of the transaction.

 

We are currently in discussions with Exxon with respect to extending the outside date of the proposed transaction, which is currently December 14, 2016. We are also considering options to file for leave to appeal to the Supreme Court of Canada. If the transaction is not effected prior to the outside date, either party has the right to terminate the arrangement agreement. No assurances can be made that InterOil and Exxon will agree on an extension of the outside date and/or that InterOil will be able to effect the transaction with Exxon under the arrangement agreement. On completion of the transaction, financial advisor fees will become payable.

 

 

In certain circumstances, the termination of the arrangement agreement entered into with Exxon, may result in the Company being required to pay a termination fee of $67 million. The obligation to pay the termination fee will arise where the arrangement agreement is terminated inter alia:

 

(a)

by Exxon, because of a change to the InterOil Board’s recommendation of the arrangement, except where the change in recommendation resulted from the occurrence of an ExxonMobil Material Adverse Effect (as defined in the arrangement agreement);

 

(b)

by the Company in order to enter into a Superior Proposal (as defined in the arrangement agreement); or

 

(c)

by Exxon, as a result of a breach of InterOil’s non-solicitation covenants (as set out in the arrangement agreement).

 

Further information about the pending transaction with Exxon is set out in filings which are available under our profile on www.sedar.com.

 

 

SELECTED FINANCIAL INFORMATION AND HIGHLIGHTS

 

Consolidated Results for the Quarters and Nine Months Ended September 30, 2016 and 2015

 

Consolidated – Operating results		Quarter ended September 30,								Nine months ended September 30,
($ thousands, except per share data)		2016				2015				2016				2015
Interest revenue			7,067				11,244				(3,189	)			8,380
Other			97				578				578				3,013
Total revenue			7,164				11,822				(2,611	)			11,393
Administrative and general expenses			(14,302	)			(6,103	)			(54,960	)			(19,762	)
Legal and professional fees			(2,121	)			414				(9,074	)			(2,345	)
Exploration costs, excluding exploration impairment			(2,988	)			(27,172	)			(3,047	)			(54,144	)
Exploration impairment			-				(78,236	)			-				(78,236	)
Finance costs, excluding interest expense			(968	)			(1,917	)			(11,472	)			(10,514	)
Legal settlement expense			(7,500	)			-				(7,500	)			-
Foreign exchange gains/(losses)			12				(646	)			137				872
EBITDA (1)			(20,703	)			(101,838	)			(88,527	)			(152,736	)
Depreciation and amortization			(235	)			(118	)			(978	)			(373	)
Interest expense			(4,620	)			(1,513	)			(10,159	)			(4,483	)
Loss for the period from continuing operations before income taxes			(25,558	)			(103,469	)			(99,664	)			(157,592	)
Income tax expense			(124	)			(256	)			(542	)			(534	)
Loss for the period			(25,682	)			(103,725	)			(100,206	)			(158,126	)
Basic loss per share			(0.51	)			(2.09	)			(2.01	)			(3.19	)
Diluted loss per share			(0.51	)			(2.09	)			(2.01	)			(3.19	)
Total assets			1,178,399				1,231,923				1,178,399				1,231,923
Total liabilities			456,591				354,756				456,591				354,756
Total long-term liabilities			92,088				96,000				92,088				96,000

Notes:

(1)

EBITDA is a non-GAAP measure and is reconciled to IFRS under the heading “Non-GAAP Measures and Reconciliation”.

 

Analysis Comparing Financial Condition as at September 30, 2016 and 2015

 

As at September 30, 2016, our debt-to-capital ratio (being debt divided by [shareholders’ equity plus debt]) was 29%, compared to 7% as at September 30, 2015, well below our targeted maximum gearing level of 50%. Gearing targets are based on factors that include operating cash flows, cash needs for development, capital market and economic conditions, and are assessed regularly. Our current ratio (being current assets divided by current liabilities), which measures our ability to meet short-term obligations, was 1.6 times as at September 30, 2016, compared to 2.8 times as at September 30, 2015. The current ratio satisfied our internal target of above 1.5 times as at September 30, 2016.

 

Variance in Total Assets:

As at September 30, 2016, our total assets amounted to $1,178.4 million, compared with $1,191.4 million as at December 31, 2015. The decrease of $13.0 million, or 1%, from December 31, 2015, was primarily due to:

-

$52.5 million decrease in trade and other receivables, mainly due to receipt of funds from Total in relation to a transition services agreement and an adjustment to the discounted value of sale proceeds receivable from Total as a result of the change to the expected cash flow timing of the interim resource payment under the Total SSA from June 2016 to April 2017.

 

 

 

-

$22.0 million decrease in cash and cash equivalents and restricted cash, mainly attributable to the drilling of Antelope-6, site preparation and pre-spud works for Antelope-7, costs for development survey, environmental and societal studies, preparation works, project finance and operator transition for the Papua LNG Project and head office costs incurred during the nine months ended September 30, 2016.

 

These decreases have been partially offset by:

 

-

$63.5 million increase in exploration and evaluation assets costs capitalized during the nine months ended September 30, 2016, primarily associated with the drilling and testing costs for Antelope-6, site preparation and pre-spud work for Antetelope-7 in PRL 15, and costs incurred for development survey, environmental and societal studies, preparation works, project finance and operator transition for the Papua LNG Project.

 

Variance in Total Liabilities:

As at September 30, 2016, our total liabilities amounted to $456.6 million, compared with $391.7 million at December 31, 2015. The increase of $64.9 million, or 17%, from December 31, 2015, was primarily due to:

 

-

$160.0 million increase in secured loans as a result of the drawdowns of $290.0 million under the ANZ Facility, which was partly used to refinance the loan under the Credit Suisse Facility during the quarter ended June 30, 2016.

-

$4.5 million increase in other non-current liabilities due to the unwinding of the discount on the liability to PRE during the nine months ended September 30, 2016.

 

These increases have been partially offset by:

 

-

$99.2 million decrease in trade and other payables resulting mainly due to the restructure of our activities as a result of the transition of operatorship of PRL 15 to Total and deferral of seismic and drilling activities outside of PRL 15 until the Elk-Antelope appraisal program is completed. The temporary assignment of rig 115 to Total for drilling of Antelope-7 has further decreased the onerous rig 115 contract provision at September 30, 2016.

 

Analysis of Consolidated Financial Results Comparing Quarters and Nine Months Ended September 30, 2016 and 2015

 

Our net loss for the quarter ended September 30, 2016 was $25.7 million, compared with a net loss of $103.7 million for the same quarter in 2015, a decrease of $78.0 million. This was primarily due to the recognition of $78.2 million exploration impairment expense in the quarter ended September 30, 2015 associated with the Wahoo well, in addition to a $24.2 million decrease in exploration costs as a result of lower exploration seismic activities during the current quarter. These decreases have been partly reduced by the $8.2 million increase in administrative and general expenses resulting from the stock compensation expense incurred for the restricted stock units granted during the year, costs associated with the potential sale of the Company, restructure of our operations and corporate functions and deferral of seismic and drilling activities outside of PRL 15 until the Elk-Antelope appraisal program is completed, resulting in costs being expensed as incurred, rather than capitalized. In addition, there was a $7.5 million legal settlement expense during the quarter ended September 30, 2016 associated with the settlement of the claim from Puma in relation to sludge which Puma asserted was found in the tanks of the refinery at the time the refinery was sold to Puma in June 2014.

 

Our net loss for the nine months ended September 30, 2016 was $100.2 million, compared with a net loss of $158.1 million for the same period in 2015, a decrease of $57.9 million. This was primarily due to the recognition of $78.2 million exploration impairment expense in the nine months ended September 30, 2015 associated with the Wahoo well, in addition to a $51.2 million decrease in exploration costs as a result of lower exploration seismic activities during the nine months ended September 30, 2016. These decreases have been partly reduced by the $35.2 million increase in administrative and general expenses for the reasons discussed above. In addition, there was an $11.6 million decrease in interest revenue, mainly due to the adjustments to the amount receivable under the Total SSA as a result of a change in the timing of interim certification payments from June 2016 to April 2017; a $6.7 million increase in legal and professional fees, mainly relating to the potential sale of the Company, shareholder proposals at the Annual General Meeting and other corporate legal matters during the period; a $5.7 million increase in interest expense and a $0.9 million increase in finance costs, primarily incurred under the ANZ Facility; and a $2.4 million decrease in other revenues, primarily due to the reduction in the volume of support services provided to Puma. In addition, there was a $7.5 million legal settlement expense during the quarter ended September 30, 2016 associated with the settlement of the claim from Puma, as discussed above.

 

 

 

The table below analyzes key movements, the net of which primarily explains the variance in results between the quarters and nine months ended September 30, 2016 and 2015:

 

				Quarterly Variance ($ millions)		Nine Months Variance ($ millions)
				($78.0)		($57.9)		Net loss variance for the comparative periods primarily due to:
Ø		Interest revenue		($4.2)		($11.6)		Decrease in interest income for the nine month period was mainly due to the adjustments to the amount receivable under the Total SSA as a result of a change in the timing of interim certification payments from June 2016 to September 2016 during the first quarter of 2016 and from September 2016 to March 2017 during the second quarter of 2016, and again from March 2017 to April 2017 during the third quarter of 2016.
Ø		Other revenue		($0.5)		($2.4)		Other revenues was comprised of support services (post divestment) recharged to Puma. The volume of support services provided has decreased since the prior year period.
Ø		Administrative and general expenses		($8.2)		($35.2)		The increase in administrative and general expenses was mainly due to the stock compensation expense incurred for the restricted stock units granted during the nine months ended September 30, 2016, costs associated with the potential sale of the Company, restructure of our operations and corporate functions and deferral of seismic and drilling activities outside of PRL 15 until the Elk-Antelope appraisal program is completed, resulting in costs being expensed as incurred, rather than capitalized.
Ø		Legal and professional fees		($2.5)		($6.7)		The increase in legal and professional fees is mainly relating to the costs associated with the potential sale of the Company, the shareholder proposals at the Annual General Meeting and other corporate legal matters during the current quarter.
Ø		Exploration costs		$24.2		$51.1		The decrease in exploration costs for the nine month period was primarily as a result of lower exploration seismic activities. During the prior year periods, we expensed seismic activities over the Murua lead in PPL 474 and PPL 476, exploration seismic over PPL 475, and airborne gravity survey costs incurred for PPL 476, PPL 477 and PRL15. The temporary assignment of rig 115 for drilling of Antelope-7 has decreased the onerous rig 115 contract provision, which has resulted in a further decrease in exploration costs.
Ø		Exploration impairment		$78.2		$78.2		The decrease in exploration impairment for the quarter and nine month period was due to the recognition of $78.2 million exploration impairment expense in the quarter ended September 30, 2015 associated with the Wahoo well.

 

 

Ø		Finance costs, excluding interest expense		$0.9		($1.0)		The increase in finance costs for the nine months ended September 30, 2016 was primarily due to facility fees payable on finalizing the ANZ Facility. The decrease for the quarter ended September 30, 2016 was due to lower commitment fees payable on the ANZ facility due to higher utilization.
Ø		Legal settlement expense		($7.5)		($7.5)		During the quarter ended September 30, 2016, we incurred an expense of $7.5 million for the settlement of the claim from Puma in relation to sludge which Puma asserted was found in the tanks of the refinery at the time the refinery was sold to Puma in June 2014.
Ø		Foreign exchange gains		$0.7		($0.7)		The decrease in foreign exchange gains for the nine months ended September 30, 2016 was primarily due to lower depreciation of the PGK against USD as compared to the nine months ended September 30, 2015.
Ø		Depreciation and amortization		($0.1)		($0.6)		The increase in depreciation expense was due to a decrease in the depreciation that could be capitalized to projects as a result of the reduction in our exploration activities.
Ø		Interest expense		($3.1)		($5.7)		The increase in interest expense was largely due to drawdowns under the Credit Suisse and ANZ Facilities during the nine months ended September 30, 2016.

 

Analysis of Consolidated Cash Flows Comparing Quarters and Nine Months Ended September 30, 2016 and 2015

 

As at September 30, 2016, we had cash, cash equivalents, and restricted cash of $19.3 million (September 30, 2015 - $126.3 million), of which $10.3 million (September 30, 2015 - $8.2 million) was restricted. Of the total restricted cash at September 30, 2016, $10.2 million was restricted as a debt reserve under the ANZ Facility and the balance was made up of a cash deposit for lease of office premises and term deposits on our PPLs.

 

		Quarter ended September 30,								Nine months ended September 30,
($ thousands)		2016				2015				2016				2015
Net cash (outflows)/inflows from:
Operations			(38,537	)			(16,700	)			(101,526	)			(61,126	)
Investing			(18,327	)			(57,488	)			(82,627	)			(214,202	)
Financing			60,000				-				160,000				-
Net cash movement			3,136				(74,188	)			(24,153	)			(275,328	)
Opening cash			5,780				192,265				33,069				393,405
Closing cash			8,916				118,077				8,916				118,077

 

Cash flows used in operating activities

 

Cash outflows from operating activities for the quarter ended September 30, 2016 were $38.5 million compared with outflows of $16.7 million for the quarter ended September 30, 2015, a net increase in cash outflows of $21.8 million. Cash outflows from operating activities for the nine months ended September 30, 2016 were $101.5 million compared with outflows of $61.1 million for the nine months ended September 30, 2015, a net increase in cash outflows of $40.4 million.

 

This table outlines key variances in the cash inflows/(outflows) from operating activities between the quarters and nine months ended September 30, 2016 and 2015:

 

 

				Quarterly variance ($ millions)		Nine Months variance ($ millions)
				($21.8)		($40.4)		Variance for the comparative periods primarily due to:
Ø		Cash used in operations, before changes in operating working capital		$8.2		$5.4		The decrease in cash used in operations, before changes in operating working capital for the quarter, was mainly due to the decrease in exploration costs expensed and offset by the increase in administrative and general expenses, finance costs and interest expense.
Ø		Cash generated from operations relating to changes in operating working capital		($30.0)		($45.8)		The increase in cash used in operations relating to changes in operating working capital was due to a reduction in general and head office related trade payables and accruals.

 

Cash flows used in investing activities

 

Cash outflows from investing activities for the quarter ended September 30, 2016 were $18.3 million compared with an outflow of $57.5 million for the quarter ended September 30, 2015, a net decrease in cash outflows of $39.2 million. Cash outflows from investing activities for the nine months ended September 30, 2016 were $82.6 million compared with an outflow of $214.2 million for the nine months ended September 30, 2015, a net decrease in cash outflows of $131.6 million.

 

This table outlines key variances in cash (outflows)/inflows from investing activities between the quarters and nine months ended September 30, 2016 and 2015:

 

				Quarterly variance ($ millions)		Nine Months variance ($ millions)
				$39.2		$131.6		Variance for the comparative periods primarily due to:
Ø		Expenditure on exploration and evaluation assets net of JV contributions		$21.9		$143.9		The decrease in expenditure on exploration and evaluation assets is due to a reduction of all drilling activities during the quarter and nine months ended September 30, 2016.
Ø		Proceeds from sale of drilling consumables, spares and plant and equipment		$0.7		$11.9		The increase in the proceeds from sale of drilling consumables, spares and plant and equipment was due to the restructure of our activities and deferral of seismic and drilling activities outside of PRL 15 until the Elk-Antelope appraisal program is completed. As a result, we have disposed of surplus drilling consumables, spares and plant and equipment.
Ø		(Increase)/decrease in restricted cash held as security on borrowings		($0.1)		($2.2)		Increase in restricted cash held as security under the ANZ Facility as compared to Credit Suisse Facility.
Ø		Cash (used in)/ generated from investing activities relating to change in non-operating working capital		($16.6)		($22.1)		The movement in non-operating working capital was primarily related to a reduction in trade payables and accruals in our exploration and development operations, in addition to a decrease in receivables due to receipt of funds from Total related to services provided under the transitional services arrangements for transfer of operatorship to Total.

 

 

Cash flows generated from financing activities

 

Cash inflows from financing activities for the quarter ended September 30, 2016 were $60.0 million compared with nil for the quarter ended September 30, 2015, a net increase in cash inflows of $60.0 million. Cash inflows from financing activities for the nine months ended September 30, 2016 were $160.0 million compared with nil for the nine months ended September 30, 2015, a net increase in cash inflows of $160.0 million.

 

This table outlines key variances in cash inflows/(outflows) from financing activities between quarters and nine months ended September 30, 2016 and 2015:

 

				Quarterly variance ($ millions)		Nine Months variance ($ millions)
				$60.0		$160.0		Variance for the comparative periods primarily due to:
Ø		Proceeds from drawdown of Credit Facility		$0.0		$60.0		Drawdown of $60.0 million from the Credit Suisse Facility during the quarter ended March 31, 2016, compared with no drawdowns during the prior year periods.
Ø		Repayment of Credit Suisse Facility		$0.0		($190.0)		Full repayment of loan under Credit Suisse Facility was made during the quarter ended June 30, 2016.
Ø		Proceeds from drawdown of ANZ Facility		$60.0		$290.0		Drawdown of $290.0 million from the ANZ Facility during the nine months ended September 30, 2016, which is used partly to refinance the Credit Suisse Facility.

 

 

Summary of Consolidated Quarterly Financial Results for Past Eight Quarters

 

This table contains consolidated results for the eight quarters ended September 30, 2016 on a consolidated basis.

 

Quarters ended ($ thousands except per share		2016												2015																2014
data)		Sep-30				Jun-30				Mar-31				Dec-31				Sep-30				Jun-30				Mar-31				Dec-31
Total revenues			7,164				(10,696	)			921				11,690				11,822				(13,643	)			13,215				(13,182	)
EBITDA (1)			(20,703	)			(53,249	)			(14,575	)			(81,543	)			(101,838	)			(30,583	)			(20,317	)			(60,443	)
Net loss			(25,682	)			(57,546	)			(16,978	)			(83,830	)			(103,725	)			(32,531	)			(21,869	)			(64,205	)
From continuing operations			(25,682	)			(57,546	)			(16,978	)			(83,830	)			(103,725	)			(32,531	)			(21,869	)			(62,474	)
From discontinued operations			-				-				-				-				-				-				-				(1,731	)
Basic loss per share			(0.51	)			(1.16	)			(0.34	)			(1.69	)			(0.29	)			(0.66	)			(0.44	)			(1.30	)
From continuing operations			(0.51	)			(1.16	)			(0.34	)			(1.69	)			(0.29	)			(0.66	)			(0.44	)			(1.26	)
From discontinued operations			-				-				-				-				-				-				-				(0.04	)
Diluted loss per share			(0.51	)			(1.16	)			(0.34	)			(1.69	)			(2.09	)			(0.66	)			(0.44	)			(1.30	)
From continuing operations			(0.51	)			(1.16	)			(0.34	)			(1.69	)			(2.09	)			(0.66	)			(0.44	)			(1.26	)
From discontinued operations			-				-				-				-				-				-				-				(0.04	)

 

(1)

EBITDA is a non-GAAP measure and is reconciled to IFRS under the heading “Non-GAAP Measures and Reconciliation”.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Summary of Debt Facilities

 

This table summarizes the debt facilities available to us and the balances outstanding as at September 30, 2016:

 

Organization		Facility				Balance outstanding September 30, 2016				Weighted average interest rate				Maturity date
ANZ Facility		$	400,000,000			$	290,000,000				6.61	%		December 2017*

 

*

Subject to achievement of certain interim milestones.

 

ANZ Facility

 

On April 21, 2016, we entered into the ANZ Facility which replaced the Credit Suisse Facility. The ANZ Facility has an annual interest rate of LIBOR plus 6% and terminates on December 31, 2017, subject to certain interim milestones being achieved. The other lenders in the syndicate are Westpac, BSP, Intesa Sanpaolo SPA, Credit Suisse, SocGen, Morgan Stanley and UBS. Security for the ANZ Facility includes certain of the Company’s subsidiaries’ assets.

 

During the third quarter of 2016, we drew down $60.0 million under this Facility. As at September 30, 2016, we were in compliance with the debt covenants.

 

Other Sources of Capital

 

Our share of expenditure on exploration wells, appraisal wells and extended well test programs is funded by capital raising activities, debt, cash calls from joint venture partners and asset sales.

 

 

Capital Expenditure

 

Net capital expenditure on exploration and evaluation assets

 

Net capital expenditures on our exploration and evaluation assets in PNG for the quarter ended September 30, 2016 were $19.1 million, compared with a decrease of $11.2 million during the same period in 2015. Total net capital expenditure for the nine months ended September 30, 2016 was $63.6 million, compared with $135.2 million for the same period in 2015.

 

This analysis outlines key net capital expenditure in the quarter and nine months ended September 30, 2016:

 

		Quarterly movement ($ millions)		Nine Months movement ($ millions)
		$546.2		$501.7		Opening balance of exploration and evaluation assets
		$19.1		$63.6		Net capital expenditure consisting of following:
Ø		$0.4		$24.2		Costs for drilling and testing of Antelope-6.
Ø		$6.7		$14.8		Costs for development survey, environmental and societal studies, preparation works, project finance and operator transition for the Papua LNG Project.
Ø		$6.7		$13.5		Costs for site preparation and pre-spud work of Antelope-7.
Ø		$5.3		$11.1		Other expenditures, including indirect project support costs and field care and maintenance for PRL 15 and offset by a reduction to inventory due to sales during the periods.
Ø		$565.3		$565.3		Closing balance of exploration and evaluation assets

 

Gross capital expenditure on exploration and evaluation assets

 

Gross capital expenditure on our exploration and evaluation assets in PNG for the quarter ended September 30, 2016 was $25.9 million, compared with $101.1 million during the same period in 2015. Gross capital expenditure on our exploration and evaluation assets in PNG for the nine months ended September 30, 2016 was $71.6 million, compared with $395.5 million during the same period in 2015.

 

This analysis outlines key gross capital expenditures in the quarter and nine months ended September 30, 2016:

 

		Quarterly movement ($ millions)		Nine Months movement ($ millions)
		$25.9		$71.6		Gross capital expenditure consisting of following:
Ø		$1.4		$25.1		Costs for drilling and testing of Antelope-6.
Ø		$6.8		$15.1		Costs for development survey, environmental and societal studies, preparation works, project finance and operator transition for the Papua LNG Project.
Ø		$6.8		$13.7		Costs for site preparation and pre-spud work of Antelope-7.
Ø		$10.9		$17.7		Other expenditures, including indirect project support costs and field care and maintenance for PRL 15 and offset by a reduction to inventory due to sales and write down during the periods.

 

 

Capital Requirements

 

Our primary use of capital resources has been for exploration and development activities. We have to execute exploration activities within a set timeframe to meet the minimum license commitments in relation to our PPLs and PRLs. Noted below are our contractual obligations and commitments over the next five years which are required at a minimum to maintain our licenses in good standing. Subject to meeting the license commitment requirements, our capital expenditures can be accelerated or decelerated at our discretion.

 

On April 21, 2016, we entered the ANZ Facility. The ANZ Facility has an annual interest rate of LIBOR plus 6% and terminates on December 31, 2017, subject to certain interim milestones being achieved. The other lenders in the syndicate are Westpac, BSP, Intesa Sanpaolo SPA, Credit Suisse, SocGen, Morgan Stanley and UBS. Security for the ANZ Facility includes certain of the Company’s subsidiaries’ assets. The covenants include a defined calculation for gearing not to exceed 60% at any time, a requirement that the equity does not fall below $500.0 million at any time, agreed expenditure limits tested for the six months period ending each quarter and a requirement to obtain consent to redraw the facility after receipt of the interim certification payment under the Total SSA.

 

On May 20, 2016, the PRL 15 Joint Venture approved the drilling of a further appraisal well (the Antelope-7 well) within the Antelope field to appraise for additional volumes over the western flank of the field, as indicated by the Antelope-5 well results and seismic reprocessing. As a result, in June 2016 we estimated that the interim resource certification payment under the Total SSA would be received by the end of the first quarter of 2017, as opposed to September 2016. In September 2016 we further adjusted the expected timing of the payment from the end of the first quarter of 2017 to April 2017 to take into account the timing of the spudding of Antelope-7. We believe that the ANZ Facility will enable us to fund operations until the estimated interim certification payment is received. We can also raise additional funding through asset sales or additional equity to ensure sufficient cash is available to further our development plans.

 

In July 2015, we filed a short form base shelf prospectus with the Alberta Securities Commission and a corresponding registration statement on Form F-10 with the SEC pursuant to the multi-jurisdictional disclosure system. These filings will enable us to add financial flexibility in the future if needed and issue, from time to time, up to an aggregate of $1.0 billion of securities in one or more offerings for a period of 25 months from the effective date of the prospectus. These securities may be debt securities, common shares, preferred shares, warrants or a combination thereof. We expect that we will be able to secure the necessary financing through one, or a combination of, the aforementioned alternatives.

 

Oil and gas exploration and development and liquefaction are capital intensive. Our PRL 15 Joint Venture share of costs of construction of a liquefaction plant, central processing facility and other infrastructure associated with the proposed Papua LNG Project may amount to billions of dollars and thus exceed our existing cash balances. Our ability to raise capital depends, among other things, on market conditions. No assurance can be given that we will obtain new capital or refinance current facilities on terms that are acceptable to us, particularly with market volatility.

 

 

Contractual Obligations and Commitments

 

This table contains information on payments to meet our contracted exploration and debt obligations for each of the next five years and beyond. It should be read in conjunction with our Condensed Consolidated Interim Financial Statements, Consolidated Financial Statements and respective notes thereto.

 

		Payments Due by Period
Contractual obligations ($ thousands)		Total				Less than 1 year				1 - 2 years				2 - 3 years				3 - 4 years				4 - 5 years				More than 5 years
PPLs and PRLs			280,281				418				84,563				-				195,300				-				-
Secured loans			293,645				293,645				-				-				-				-				-
Other non-current liabilities			96,000				-				96,000				-				-				-				-
Total			669,926				294,063				180,563				-				195,300				-				-

 

The PPL and PRL amounts represent our commitments on these licenses as at September 30, 2016. On March 6, 2014, our applications for new PPLs were approved and included new license commitments. On May 6, 2016, our applications to vary the PPLs years three and four commitments were approved. The original commitments and the approved variations require us to spend an additional $252.5 million over the remainder of their six-year terms.

 

Further, the terms of grant of PRL 39 requires us to spend $27.8 million on the license area by the end of 2018.

 

Off Balance Sheet Arrangements

 

During the quarter and as at September 30, 2016, we had no off balance sheet arrangements or relationships with unconsolidated entities or financial partnerships.

 

Transactions with Related Parties

 

Other than remuneration paid to key management personnel, no related party transaction took place during the quarter and nine months ended September 30, 2016.

 

Share Capital

 

Our authorized share capital consists of an unlimited number of common shares and unlimited number of preferred shares, of which 1,035,554 Series A preferred shares are authorized (none of which are outstanding). As of September 30, 2016, we had 50,147,354 common shares issued and outstanding (50,804,626 common shares on a fully diluted basis) and no preferred shares issued and outstanding. The potential dilutive instruments outstanding as at September 30, 2016 included employee stock options and restricted stock in respect of 657,272 common shares.

 

As of November 14, 2016, we had 50,147,354 common shares issued and outstanding (50,804,626 common shares on a fully diluted basis) and no preferred shares issued and outstanding. The potential dilutive instruments outstanding as at November 14, 2016 included employee stock options and restricted stock in respect of 657,272 common shares.

 

RISK FACTORS

 

Our business operations and financial position are subject to risks. A summary of the key risks that may affect matters addressed in this document have been included under “Forward Looking Statements” above. Detailed risk factors can be found under “Risk Factors” in our 2015 AIF and in our Management Information Circular dated August 16, 2016.

 

 

CRITICAL ACCOUNTING ESTIMATES

 

The preparation of financial statements in accordance with IFRS requires our management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Interim Financial Statements and accompanying notes. Actual results could differ from those estimates. The effect of changes in estimates on future periods have not been disclosed in the Condensed Consolidated Interim Financial Statements as estimating it is impracticable. During the nine months ended September 30, 2016, there were no changes in the methodology used to make critical accounting estimates to those disclosed in our 2015 MD&A.

 

For a discussion of those accounting policies, please refer to Note 2 of the notes to our Consolidated Financial Statements for the year ended December 31, 2015, available at www.sedar.com, which summarizes our significant accounting policies.

 

NEW ACCOUNTING STANDARDS

 

New accounting standards not yet applicable as at September 30, 2016

 

These new standards have been issued but are not yet effective for the financial year beginning January 1, 2016 and have not been early adopted:

 

-

IFRS 9 ‘Financial Instruments’ (effective from January 1, 2018): This addresses the classification and measurement of financial assets. The standard is not applicable until January 1, 2018 but is available for early adoption. We have yet to assess IFRS 9’s full impact, but we do not expect any material changes due to this standard. We have not yet decided whether to early adopt IFRS 9.

 

-

IFRS 15 ‘Revenue from contracts with customers’ (effective from January 1, 2018): The new standard is based on the principle that revenue is recognized when control of a good or service transfers to a customer, so the notion of control replaces the existing notion of risks and rewards. We are currently evaluating the impact of adopting this standard.

 

-

IFRS 16 ‘Leases’ (effective from January 1, 2019): The new standard now requires lessees to recognize a lease liability reflecting future lease payments and a ‘right-of-use asset’ for virtually all lease contracts. The standard has an optional exemption for certain short-term leases and leases of low-value assets; however, this exemption can only be applied by lessees. The standard also provides guidance on the definition of a lease (as well as the guidance on the combination and separation of contracts). We are currently evaluating the impact of this standard.

 

NON-GAAP MEASURES AND RECONCILIATION

 

In this MD&A, we use the term EBITDA which is a non-GAAP financial measure.

 

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.

 

This table reconciles net (loss)/profit from continuing operations, a GAAP measure, to EBITDA from continuing operations, a non-GAAP measure for each of the last eight quarters.

 

 

Quarters ended		2016												2015																2014
($ thousands)		Sep-30				Jun-30				Mar-31				Dec-31				Sep-30				Jun-30				Mar-31				Dec-31
Earnings before interest, taxes, depreciation and amortization			(20,703	)			(53,249	)			(14,575	)			(81,543	)			(101,838	)			(30,583	)			(20,317	)			(60,443	)
Interest expense			(4,620	)			(3,406	)			(2,132	)			(1,639	)			(1,513	)			(1,492	)			(1,477	)			(1,464	)
Income taxes			(124	)			(343	)			(75	)			(495	)			(256	)			(207	)			(70	)			(211	)
Depreciation and amortisation			(235	)			(548	)			(196	)			(153	)			(118	)			(249	)			(5	)			(356	)
From continuing operations			(25,682	)			(57,546	)			(16,978	)			(83,830	)			(103,725	)			(32,531	)			(21,869	)			(62,474	)
From discontinued operations			-				-				-				-				-				-				-				(1,731	)
Net loss			(25,682	)			(57,546	)			(16,978	)			(83,830	)			(103,725	)			(32,531	)			(21,869	)			(64,205	)

 

PUBLIC SECURITIES FILINGS

 

You may access additional information about us, including our 2015 AIF, in documents filed with the Canadian Securities Administrators at www.sedar.com, and in documents, including our Form 40-F, filed with the SEC at www.sec.gov. Additional information is also available on our website www.interoil.com.

 

DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING

 

Disclosure Controls and Procedures

 

Our Chief Executive Officer and Chief Financial Officer have designed, or caused to be designed under their supervision, disclosure controls and procedures to provide reasonable assurance that: (i) material information relating to us is made known to our Chief Executive Officer and Chief Financial Officer by others, particularly during the period in which the annual and interim filings are being prepared; and (ii) information required to be disclosed by us in our annual filings, interim filings or other reports filed or submitted by us under securities legislation is recorded, processed, summarized and reported within the time specified in securities legislation. Such officers have evaluated, or caused to be evaluated under their supervision, the effectiveness of our disclosure controls and procedures at our financial year-end and have concluded that our disclosure controls and procedures are effective at December 31, 2015 for the foregoing purposes.

 

While our Chief Executive Officer and Chief Financial Officer believe that our disclosure controls and procedures provide reasonable assurance that they are effective, they do not expect that the disclosure controls and procedures will necessarily prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

 

Internal Controls over Financial Reporting

 

Our Chief Executive Officer and Chief Financial Officer have designed, or caused to be designed under their supervision, internal controls over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Such officers have evaluated, or caused to be evaluated under their supervision, the effectiveness of our internal controls over financial reporting at our financial year-end and concluded that our internal control over financial reporting is effective, at December 31, 2015, for the foregoing purpose.

 

 

Material Changes in Internal Control over Financial Reporting

 

No material change in our internal controls over financial reporting were identified during the nine months ended September 30, 2016, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

A control system, including our disclosure and internal controls and procedures, can provide only reasonable, but not absolute, assurance that the objectives of the control system will be met, no matter how well it is conceived, and it should not be expected that the disclosure and internal controls and procedures will prevent all errors or fraud.

 

 

 

Exhibit 2

 

InterOil Corporation Condensed Consolidated Interim Financial Statements (Unaudited, Expressed in United States dollars)   Quarter and nine months ended September 30, 2016 and 2015

 

 

InterOil Corporation Condensed Consolidated Interim Financial Statements (Unaudited, Expressed in United States dollars)

 

Table of contents

 

Consolidated Balance Sheets	1
Consolidated Income Statements	2
Consolidated Statements of Comprehensive Income	3
Consolidated Statements of Changes in Equity	4
Consolidated Statements of Cash Flows	5
Notes to the Condensed Consolidated Interim Financial Statements	6

 

 

InterOil Corporation Consolidated Balance Sheets (Unaudited, Expressed in United States dollars)

 

		As at
		September 30,				December 31,				September 30,
		2016				2015				2015
		$				$				$
Assets
Current assets:
Cash and cash equivalents			8,916,506				33,069,122				118,077,110
Cash restricted			10,187,832				7,966,601				7,964,702
Trade and other receivables (note 4)			556,333,322				608,838,604				602,817,890
Other current assets			1,934,919				2,222,952				2,235,366
Assets classified as held for sale (note 6)			567,085				6,701,472				-
Prepaid expenses			591,616				1,627,003				865,177
Total current assets			578,531,280				660,425,754				731,960,245
Non-current assets:
Cash restricted			150,136				228,286				235,538
Plant and equipment			8,265,619				4,223,335				9,843,500
Exploration and evaluation assets (note 5)			565,266,175				501,724,126				460,183,610
Other non-current receivables			26,185,489				24,793,218				29,700,534
Total non-current assets			599,867,419				530,968,965				499,963,182
Total assets			1,178,398,699				1,191,394,719				1,231,923,427
Liabilities and shareholders' equity
Current liabilities:
Trade and other payables (note 7)			72,900,212				172,119,677				179,881,533
Income tax payable			1,602,553				2,014,414				1,890,166
Secured loans (note 8)			290,000,000				130,000,000				-
Indirect participation interest			-				-				7,449,409
2.75% convertible notes liability			-				-				69,535,121
Total current liabilities			364,502,765				304,134,091				258,756,229
Non-current liabilities:
Indirect participation interest			7,449,409				7,449,409				-
Other non-current liabilities			84,638,446				80,138,254				96,000,000
Total non-current liabilities			92,087,855				87,587,663				96,000,000
Total liabilities			456,590,620				391,721,754				354,756,229
Equity:
Equity attributable to owners of InterOil Corporation:
Share capital (note 9)			1,023,888,101				1,000,358,320				999,701,798
Authorized - unlimited
Issued and outstanding - 50,147,354
(Dec 31, 2015 - 49,572,811)
(Sep 30, 2015 - 49,560,160)
2.75% convertible notes			-				-				14,297,627
Contributed surplus			35,691,739				36,880,264				16,903,110
Accumulated deficit			(337,771,761	)			(237,565,619	)			(153,735,337	)
Total equity attributable to owners of InterOil Corporation			721,808,079				799,672,965				877,167,198
Total liabilities and equity			1,178,398,699				1,191,394,719				1,231,923,427

 

See accompanying notes to the condensed consolidated interim financial statements

 

 

InterOil Corporation Consolidated Income Statements (Unaudited, Expressed in United States dollars)

 

		Quarter ended								Nine months ended
		September 30,				September 30,				September 30,				September 30,
		2016				2015				2016				2015
		$				$				$				$
Revenue
Interest revenue (note 10)			7,066,636				11,243,704				(3,189,492	)			8,379,741
Other revenue			97,333				578,070				578,316				3,013,423
			7,163,969				11,821,774				(2,611,176	)			11,393,164
Administrative and general expenses (note 12)			(14,301,551	)			(6,102,878	)			(54,959,876	)			(19,761,872	)
Legal and professional fees			(2,120,830	)			414,534				(9,074,244	)			(2,345,224	)
Exploration costs (note 5)			(2,988,366	)			(27,172,202	)			(3,047,040	)			(54,143,596	)
Exploration impairment (note 5)			-				(78,235,581	)			-				(78,235,581	)
Finance costs (note 11)			(5,588,730	)			(3,430,019	)			(21,630,587	)			(14,996,751	)
Depreciation and amortization			(234,538	)			(118,359	)			(978,154	)			(373,171	)
Legal settlement expense (note 14)			(7,500,000	)			-				(7,500,000	)			-
Foreign exchange gains/(losses)			11,984				(645,996	)			136,619				871,586
			(32,722,031	)			(115,290,501	)			(97,053,282	)			(168,984,609	)
Loss before income taxes			(25,558,062	)			(103,468,727	)			(99,664,458	)			(157,591,445	)
Income taxes
Current tax expense			(123,929	)			(256,498	)			(541,684	)			(534,288	)
			(123,929	)			(256,498	)			(541,684	)			(534,288	)
Loss for the period			(25,681,991	)			(103,725,225	)			(100,206,142	)			(158,125,733	)
Loss is attributable to:
Owners of InterOil Corporation			(25,681,991	)			(103,725,225	)			(100,206,142	)			(158,125,733	)
			(25,681,991	)			(103,725,225	)			(100,206,142	)			(158,125,733	)
Loss per share attributable to owners of InterOil Corporation during the period
Basic loss per share from loss for the period			(0.51	)			(2.09	)			(2.01	)			(3.19	)
Diluted loss per share from loss for the period			(0.51	)			(2.09	)			(2.01	)			(3.19	)
Weighted average number of common shares outstanding
Basic (Expressed in number of common shares)			50,042,013				49,549,590				49,809,149				49,501,962
Diluted (Expressed in number of common shares)			50,042,013				49,549,590				49,809,149				49,501,962

 

See accompanying notes to the condensed consolidated interim financial statements

 

 

InterOil Corporation Consolidated Statements of Comprehensive Income (Unaudited, Expressed in United States dollars)

 

		Quarter ended								Nine months ended
		September 30,				September 30,				September 30,				September 30,
		2016				2015				2016				2015
		$				$				$				$
Loss for the period			(25,681,991	)			(103,725,225	)			(100,206,142	)			(158,125,733	)
Other comprehensive loss for the period, net of tax			-				-				-				-
Total comprehensive loss for the period			(25,681,991	)			(103,725,225	)			(100,206,142	)			(158,125,733	)
Total comprehensive loss for the period is attributable to:
Owners of InterOil Corporation			(25,681,991	)			(103,725,225	)			(100,206,142	)			(158,125,733	)
			(25,681,991	)			(103,725,225	)			(100,206,142	)			(158,125,733	)

 

See accompanying notes to the condensed consolidated interim financial statements

 

 

InterOil Corporation Consolidated Statements of Changes in Equity (Unaudited, Expressed in United States dollars)

 

		Nine months ended
		September 30,				September 30,
		2016				2015
		$				$
Transactions with owners as owners:
Share capital
At beginning of period			1,000,358,320				991,693,780
Issue of capital stock (note 9)			23,529,781				8,008,018
At end of period			1,023,888,101				999,701,798
2.75% convertible notes
At beginning and end of period			-				14,297,627
Contributed surplus
At beginning of period			36,880,264				18,270,837
Fair value of options and restricted stock transferred to share capital			(23,719,687	)			(8,304,333	)
Stock compensation expense			22,531,162				6,936,606
At end of period			35,691,739				16,903,110
Accumulated deficit
At beginning of period			(237,565,619	)			4,390,396
Net loss for the period			(100,206,142	)			(158,125,733	)
At end of period			(337,771,761	)			(153,735,337	)
Total InterOil Corporation shareholders' equity at end of period			721,808,079				877,167,198

 

See accompanying notes to the condensed consolidated interim financial statements

 

 

InterOil Corporation Consolidated Statements of Cash Flows (Unaudited, Expressed in United States dollars)

 

		Quarter ended								Nine months ended
		September 30,				September 30,				September 30,				September 30,
		2016				2015				2016				2015
		$				$				$				$
Cash flows generated from/(used in):
Operating activities
Net loss for the period			(25,681,991	)			(103,725,225	)			(100,206,142	)			(158,125,733	)
Adjustments for non-cash and non-operating transactions
Depreciation and amortization			234,538				118,359				978,154				373,171
Impairment of exploration and evaluation assets			-				78,235,581				-				78,235,581
Accretion of convertible notes liability			-				1,026,110				-				3,033,129
Stock compensation expense, including restricted stock			5,865,612				581,868				22,531,161				4,801,016
Accretion of receivable from Total S.A. (note 4)			(10,876,548	)			(11,015,238	)			(33,338,200	)			(33,053,681	)
Adjustment to carrying amount of receivable from Total S.A. (note 4)			3,835,913				-				36,617,836				25,878,655
Change in operating working capital
(Increase)/decrease in trade and other receivables			(820,122	)			4,939				1,591,997				238,315
Decrease in other current assets and prepaid expenses			347,861				262,608				1,323,418				1,954,397
(Decrease)/increase in trade and other payables			(11,441,801	)			17,810,702				(31,024,072	)			15,539,113
Net cash used in operating activities			(38,536,538	)			(16,700,296	)			(101,525,848	)			(61,126,037	)
Investing activities
Expenditure on exploration and evaluation assets net of JV contributions (note 5)			(16,470,063	)			(38,386,765	)			(64,332,057	)			(208,189,125	)
Expenditure on plant and equipment			109,900				131,151				(306,540	)			(423,558	)
Proceeds from sale of drilling consumables and spares			269,682				-				9,980,015				-
Proceeds from disposal of plant and equipment			449,493				-				2,641,196				720,000
(Increase)/decrease in restricted cash held as security on borrowings			(5,217	)			86,610				(2,143,081	)			100,893
Change in non-operating working capital
(Increase)/decrease in trade and other receivables			(586,343	)			(33,948,107	)			39,339,927				(33,948,107	)
(Decrease)/increase in trade and other payables			(2,094,704	)			14,629,045				(67,806,228	)			27,537,846
Net cash used in investing activities			(18,327,252	)			(57,488,066	)			(82,626,768	)			(214,202,051	)
Financing activities
Proceeds from drawdown of Credit Suisse secured facility			-				-				60,000,000				-
Repayment of Credit Suisse secured facility			-				-				(190,000,000	)			-
Proceeds from drawdown of ANZ secured facility			60,000,000				-				290,000,000				-
Net cash generated from financing activities			60,000,000				-				160,000,000				-
Increase/(decrease) in cash and cash equivalents			3,136,210				(74,188,362	)			(24,152,616	)			(275,328,088	)
Cash and cash equivalents, beginning of period			5,780,296				192,265,472				33,069,122				393,405,198
Cash and cash equivalents, end of period			8,916,506				118,077,110				8,916,506				118,077,110
Comprising of:
Cash on Deposit			8,916,506				67,294,966				8,916,506				67,294,966
Short Term Deposits			-				50,782,144				-				50,782,144
Total cash and cash equivalents, end of period			8,916,506				118,077,110				8,916,506				118,077,110

 

See accompanying notes to the condensed consolidated interim financial statements

 

 

InterOil Corporation Notes to Condensed Consolidated Interim Financial Statements (Unaudited, Expressed in United States dollars)

 

1.

General information

 

InterOil Corporation (the "Company" or "InterOil") is a publicly traded, independent oil and gas business with a sole focus on Papua New Guinea. The Company is incorporated and domiciled in Canada and was continued under the Business Corporations Act (Yukon Territory) on August 24, 2007. The address of its registered office is Suite 300-204 Black Street, Whitehorse, Yukon, Canada.

 

On July 21, 2016, the Company and Exxon Mobil Corporation (“Exxon”) announced that they had entered into an arrangement agreement under which Exxon agreed to acquire all of the outstanding common shares of the Company pursuant to a statutory plan of arrangement under the Business Corporations Act (Yukon).

 

Under the terms of the transaction, holders of common shares of the Company would receive, in exchange for each common share (including each common share issued to holders of restricted share units pursuant to the transaction):

 

·

US$45.00 of shares of Exxon, calculated based on the volume weighted average price of Exxon’s shares on the New York Stock Exchange for the ten (10) consecutive trading days ending on the second trading date immediately prior to closing of the transaction; and

 

·

the right to receive a contingent resource payment equal to an additional cash payment of $7.07 per common share for each tcfe gross resources certification of the Elk-Antelope field above 6.2 tcfe, up to a maximum of 10 tcfe.

 

On September 21, 2016, the Company’s shareholders, stock option holders and restricted stock unit holders voted to approve the transaction. The transaction also required approval by the Supreme Court of Yukon and on October 7, 2016, the Supreme Court of Yukon approved the transaction with Exxon. Subsequent to such approval, a shareholder, Mr. Phil Mulacek, filed a notice of appeal. On November 4, 2016, the Court of Appeal of Yukon upheld the appeal and overturned the Supreme Court of Yukon’s approval of the transaction.

 

The Company is currently in discussions with Exxon with respect to extending the outside date of the proposed transaction, which is currently December 14, 2016. The Company is also considering options to file for leave to appeal to the Supreme Court of Canada. If the transaction is not effected prior to the outside date, either party has the right to terminate the arrangement agreement. No assurances can be made that the Company and Exxon will agree on an extension of the outside date and/or that the Company will be able to effect the transaction with Exxon under the arrangement agreement. On completion of the transaction, financial advisor fees will become payable.

 

These condensed consolidated interim financial statements were approved by the Directors for issue on November 13, 2016. The Board of Directors has the power to amend and reissue these financial statements.

 

2.

Significant accounting policies

 

These condensed consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as applicable to the preparation of interim financial statements including IAS 34 – ‘Interim Financial Reporting’, and should be read in conjunction with the annual financial statements for the year ended December 31, 2015 which have been prepared in accordance with IFRS, as issued by the IASB.

 

The condensed consolidated interim financial statements for the quarter and nine months ended September 30, 2016 have been prepared under the historical cost convention.

 

The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company’s accounting policies. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results.

 

 

InterOil Corporation Notes to Condensed Consolidated Interim Financial Statements (Unaudited, Expressed in United States dollars)

 

2.

Significant accounting policies (cont’d)

 

(a)

Statement on liquidity, capital resources and capital requirements

 

These condensed consolidated interim financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities in the normal course of business as they become due.

 

The net current assets of the Company as at September 30, 2016 amounted to $214.0 million compared to $473.2 million as at September 30, 2015. The Company has cash, cash equivalents and cash restricted of $19.3 million as at September 30, 2016 (September 2015 - $126.3 million), of which $10.3 million is restricted (September 30, 2015 - $8.2 million).

 

The Company’s primary use of capital resources has been for exploration and development activities. The Company has to execute exploration activities within a set timeframe to meet the minimum license commitments in relation to the Company’s Petroleum Prospecting Licenses (“PPLs”) and Petroleum Retention Licenses (“PRLs”). Refer to note 14 for further information on these commitments. Subject to meeting the license commitment requirements, the Company’s capital expenditures can be accelerated or decelerated at its discretion.

 

On April 21, 2016, the Company entered into a $400.0 million senior secured capital expenditure facility on a syndicated basis (“ANZ Facility”) arranged by Australia and New Zealand Banking Group Limited. The ANZ Facility expires on December 31, 2017 subject to certain interim milestones being achieved. Refer to note 8 for further information on the ANZ Facility.

 

During the quarter ended June 30, 2016, the PRL 15 joint venture comprising of Total S.A. (“Total”), Oil Search Limited and InterOil (“the PRL 15 Joint Venture”) approved the drilling of a further appraisal well (the Antelope-7 well) within the Antelope field to appraise for additional volumes over the western flank of the field, as indicated by the Antelope-5 well results and seismic reprocessing. As a result, in June 2016 the Company estimated that the interim resource certification payment under the share sale agreement with Total (“Total SSA”) would be received by the end of the first quarter of 2017 as opposed to the end of September 2016. In September 2016 the Company further adjusted the expected timing of the payment from the end of the first quarter of 2017 to April 2017 to take into account the timing of the spudding of Antelope-7. Refer to note 4. The Company believes that the ANZ Facility will enable the Company to fund operations until the estimated interim certification payment is received. The Company can also raise additional funding through asset sales or additional equity to ensure sufficient cash is available to further its development plans.

 

In addition, in July 2015, the Company filed a short form base shelf prospectus with the Alberta Securities Commission and a corresponding registration statement on Form F-10 with the United States Securities and Exchange Commission (the "SEC") pursuant to the multi-jurisdictional disclosure system. These filings will enable the Company to add financial flexibility, if needed, in the future and issue, from time to time, up to an aggregate of $1.0 billion of securities in one or more offerings for a period of 25 months from the effective date of the prospectus. These securities may be debt securities, common shares, preferred shares, warrants or a combination thereof. Management expects that the Company will be able to secure the necessary financing through one, or a combination of, the aforementioned alternatives.

 

Oil and gas exploration, development and liquefaction are capital intensive. The Company’s PRL 15 Joint Venture share of the costs of construction of an LNG plant and other infrastructure associated with the proposed Elk-Antelope liquefied natural gas joint venture project operated by Total on behalf of the PRL 15 Joint Venture (the “Papua LNG Project”) may amount to billions of dollars and thus exceed the Company’s existing cash balances. The Company’s ability to raise capital depends, among other things, on market conditions. No assurances can be given that the Company will be successful in obtaining new capital or refinance current facilities on terms that are acceptable to the Company, particularly with market volatility.

 

Accordingly, these condensed consolidated interim financial statements have been prepared on a going concern basis in the belief that the Company will realize its assets and settle its liabilities and commitments in the normal course of business and for at least the amounts stated, for a period not less than one year from the date of this financial report.

 

(b)

Accounting policies

 

The accounting policies followed in these condensed consolidated interim financial statements are consistent with those of the previous financial year.

 

(c)

New standards issued but not yet effective

 

The following new standards have been issued but are not yet effective for the financial year beginning January 1, 2016 and have not been early adopted:

 

 

InterOil Corporation Notes to Condensed Consolidated Interim Financial Statements (Unaudited, Expressed in United States dollars)

 

2.

Significant accounting policies (cont’d)

 

-

IFRS 9 ‘Financial Instruments’ (effective from January 1, 2018): This addresses the classification and measurement of financial assets. The standard is not applicable until January 1, 2018 but is available for early adoption. The Company is yet to assess IFRS 9’s full impact, but does not expect any material changes due to this standard. The Company has not yet decided to early adopt IFRS 9.

 

-

IFRS 15 ‘Revenue from contracts with customers’ (effective from January 1, 2018): The new standard is based on the principle that revenue is recognized when control of a good or service transfers to a customer, so the notion of control replaces the existing notion of risks and rewards. The Company is evaluating the impact of this standard.

 

-

IFRS 16 ‘Leases’ (effective from January 1, 2019): The new standard now requires lessees to recognize a lease liability reflecting future lease payments and a ‘right-of-use asset’ for virtually all lease contracts. The standard has an optional exemption for certain short-term leases and leases of low-value assets; however, this exemption can only be applied by lessees. The standard also provides guidance on the definition of a lease (as well as the guidance on the combination and separation of contracts). The Company is evaluating the impact of this standard.

 

3.

Financial risk management

 

The Company’s activities expose it to a variety of financial risks: market risk, credit risk, liquidity risk and geographic risk. The Company’s overall risk management program focuses on the unpredictability of markets and seeks to minimize potential adverse effects on the financial performance of the Company.

 

Risk management is carried out under policies approved by the board of directors of InterOil. The Finance Department identifies, evaluates and actively mitigates financial risks in close cooperation with the Company’s operations. The board of directors of InterOil provides written principles for overall risk management, as well as written policies covering specific areas. The Company’s overall risk management program seeks to minimize potential adverse effects of these risks on the Company’s financial performance.

 

(a)

Fair values

 

		September 30, 2016								December 31, 2015								September 30, 2015								Method of
		Carrying amount				Fair value				Carrying amount				Fair value				Carrying amount				Fair value				measurement
		$				$				$				$				$				$
Financial instruments
Financial assets
Loans and receivables
Cash and cash equivalents			8,916,506				8,916,506				33,069,122				33,069,122				118,077,110				118,077,110			Amortized Cost
Cash restricted			10,337,968				10,337,968				8,194,887				8,194,887				8,200,240				8,200,240			Amortized Cost
Receivables			556,333,322				556,333,322				608,838,604				608,838,604				602,817,890				602,817,890			Amortized Cost
Other non-current receivable			26,185,489				26,185,489				24,793,218				24,793,218				-				-			Amortized Cost
Financial liabilities
Current liabilities:
Accounts payable and accrued liabilities			72,900,212				72,900,212				172,119,677				172,119,677				179,881,533				179,881,533			Amortized Cost
2.75% Convertible notes liability			-				-				-				-				69,535,121				69,535,121			Amortized Cost
Secured loans			290,000,000				290,000,000				130,000,000				130,000,000				-				-			Amortized cost
Non-current liabilities
Other non-current liabilities			84,638,446				84,638,446				80,138,254				80,138,254				-				-			Amortized Cost

 

The net fair value of cash and cash equivalents and non-interest bearing financial assets and financial liabilities of the Company approximates their carrying amounts.

 

The carrying values (less impairment provision if provided) of trade receivables and payables are assumed to approximate their fair values due to their short-term nature. The carrying value of financial liabilities approximates their fair values which, for disclosure purposes, are estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Company for similar financial instruments.

 

All the financial assets and financial liabilities in the above table are measured at a fair value on a non-recurring basis and are maintained at historical amortized cost.

 

All secured loans are subject to floating interest rates and as such the carrying values of these loans are assumed to approximate their fair values.

 

 

InterOil Corporation Notes to Condensed Consolidated Interim Financial Statements (Unaudited, Expressed in United States dollars)

 

4.

Trade and other receivables

 

		September 30,				December 31,				September 30,
		2016				2015				2015
		$				$				$
Trade and other receivables			2,658,755				49,363,739				54,579,405
Sale proceeds receivable from Total			553,674,567				559,474,865				548,238,485
Total			556,333,322				608,838,604				602,817,890

 

Trade and other receivables mainly relates to cash calls receivable from joint venture partners.

 

Sale proceeds receivable from Total

Refer to note 5 for details of the Total SSA. The “Interim Resource Payment”, as defined under the Total SSA is due to the Company following the interim certification and has been calculated to be $593.9 million based on a certification provided by Gaffney Cline & Associates, an independent qualified reserves evaluator, which certified a best case scenario of 7.1 tcfe of natural gas and natural gas liquids in the Elk-Antelope field.

 

Under the assumption that receipt of Interim Resource Payment was to take place before the end of the first quarter of 2017, the expected discounted value of this cash flow as at September 30, 2016 was $557.5 million. However, during the quarter ended September 30, 2016, the Company adjusted the expected cash flow timing of the Interim Resource Payment from March 2017 to April 2017 to accommodate the timing of spudding of Antelope-7. The Company recalculated the carrying amount of the receivable by computing the present value of estimated future cash flows at the original effective interest rate and the adjustment has been recognized in profit or loss. The Company recalculated the carrying amount of the receivable as at September 30, 2016 to be $553.7 million, with the resulting adjustment of $3.8 million being recognized in the income statement during the quarter ended September 30, 2016. During the six months ended June 30, 2016, similar adjustments totaling $32.8 million were recognised for changes in the cash flow timing of the Interim Resource Payment from June 2016 to March 2017, resulting in a total adjustment of $36.6 million recognized in the income statement during the nine months ended September 30, 2016.

 

The Company has recognized $33.3 million as a result of unwinding the discount on the receivable as interest income during the nine months ended September 30, 2016. In addition, this receivable has been reduced by $2.5 million during the nine months ended September 30, 2016, which represents the carry received from Total for development activities undertaken over PRL 15, which is to be offset against the Interim Resource Payment when due. The following table shows the movement in the receivable during the period.

 

		September 30,				December 31,				September 30,
		2016				2015				2015
		$				$				$
Balance at beginning of period			559,474,865				545,154,761				545,154,761
Interest accretion income on receivable from Total			33,338,200				44,290,061				33,053,681
Adjustment due to change in timing of estimated cash flows			(36,617,836	)			(25,878,655	)			(25,878,655	)
less amounts to be deducted for Total carry of appraisal costs			(2,520,662	)			(4,091,302	)			(4,091,302	)
Balance at end of period			553,674,567				559,474,865				548,238,485

 

5.

Exploration and evaluation assets

 

Costs of exploration and evaluation assets which are not subject to depletion are as follows:

 

		September 30,				December 31,				September 30,
		2016				2015				2015
		$				$				$
Infrastructure and drilling and construction equipment			-				-				2,588,871
Drilling consumables and spares			-				-				26,196,496
Petroleum Retention License drilling programs (Unproved)			376,986,803				312,289,360				251,705,781
Petroleum Prospecting License drilling programs (Unproved)			188,279,372				189,434,766				179,692,462
Gross Capitalized Costs			565,266,175				501,724,126				460,183,610
Accumulated depletion and amortization			-				-				-
Net Capitalized Costs			565,266,175				501,724,126				460,183,610

 

 

InterOil Corporation Notes to Condensed Consolidated Interim Financial Statements (Unaudited, Expressed in United States dollars)

 

5.

Exploration and evaluation assets (cont’d)

 

The majority of the costs capitalized under ‘Petroleum Retention License drilling programs (Unproved)’ above relate to the exploration and development expenditure on the Elk-Antelope and Triceratops fields. The majority of the costs capitalized under ‘Petroleum Prospecting License drilling programs (Unproved)’ above relates to the exploratory drilling costs relating to Bobcat-1 and Raptor-1 wells.

 

The following table discloses a breakdown of the exploration and evaluation costs incurred for the periods ended:

 

		Nine months ended				Year ended				Nine months ended
		September 30,				December 31,				September 30,
		2016				2015				2015
		$				$				$
Opening balance			501,724,126				325,041,973				325,041,973
Property Acquisition Costs			-				-				-
Exploration Costs			(235,244	)			120,201,009				33,828,804
Development Costs			67,657,387				331,641,037				292,039,823
Less: Costs transferred to income statement on impairment			-				(78,235,581	)			-
Less: Costs recovered through cash calls from joint venture partners			(3,880,094	)			(196,924,312	)			(190,726,990	)
Total Costs capitalized			63,542,049				176,682,153				135,141,637
Closing balance			565,266,175				501,724,126				460,183,610
Charged to expense
Exploration impairment			-				78,235,581				78,235,581
Exploration costs, excluding exploration impairment			3,047,040				121,829,502				54,143,596
Total charged to expense			3,047,040				200,065,083				132,379,177
Exploration and Evaluation Assets Net Additions (capitalized and expensed)			66,589,089				376,747,236				267,520,814

 

Gross and Net Cash Expenditure on exploration and evaluation assets:

The following table discloses a breakdown of the net cash expenditure on exploration and evaluation assets as disclosed in the consolidated statements of cash flows for the periods ended:

 

		Quarter ended								Nine months ended
		September 30,				September 30,				September 30,				September 30,
		2016				2015				2016				2015
		$				$				$				$
Expenditure on exploration and evaluation assets			(16,614,963	)			(108,982,533	)			(65,005,914	)			(400,509,568	)
Proceeds from joint venture cash calls			144,900				70,595,768				673,857				192,320,443
Net expenditure on exploration and evaluation assets			(16,470,063	)			(38,386,765	)			(64,332,057	)			(208,189,125	)

 

Total Sale and Purchase Agreement for PRL 15:

On March 26, 2014, the Company signed and closed the Total SSA, under which Total acquired through the purchase of all shares in a wholly owned subsidiary of InterOil, a gross 40.1275% interest in PRL 15, which contains the Elk and Antelope gas fields. InterOil received $401.3 million as a completion payment, and became entitled to receive $73.3 million upon a final investment decision on the Papua LNG Project, and $65.5 million upon the first LNG cargo from such LNG project. In addition to these fixed amounts, Total is obliged to make variable payments for gas amounts in PRL 15 that are in excess of 3.5 tcfe, based on certification by two independent certifiers following the results of the appraisal program in PRL 15. Payment for resources greater than 5.4 tcfe will be paid at certification, and payment for resources between 3.5 tcfe and up to 5.4 tcfe wll be paid on final investment decision of the Papua LNG Project.

 

 

InterOil Corporation Notes to Condensed Consolidated Interim Financial Statements (Unaudited, Expressed in United States dollars)

 

6.

Assets classified as held for sale

 

		September 30,				December 31,				September 30,
		2016				2015				2015
		$				$				$
Land and buildings			567,085				6,611,818				-
Plant and equipment			-				89,654				-
			567,085				6,701,472				-

 

At December 31, 2015, the Company classified certain assets from plant and equipment to assets classified as held for sale on the balance sheet as the Company expected a possible sale of these assets in 2016. However, due to the potential sale of the Company and the associated agreements entered into with various parties, some of these assets are now restricted from being sold and therefore, they have been reclassified from assets classified as held for sale to plant and equipment on the balance sheet as at September 30, 2016.

 

7.

Trade and other payables

 

		September 30,				December 31,				September 30,
		2016				2015				2015
		$				$				$
Onerous contracts and restructuring provisions			26,896,927				59,414,419				-
Other accounts payable and accrued liabilities			30,568,285				97,270,258				164,446,533
Petromin cash calls received			15,435,000				15,435,000				15,435,000
Total trade and other payables			72,900,212				172,119,677				179,881,533

 

Onerous contracts and restructuring provision

During the year ended December 31, 2015, the Company began a restructuring project as a result of the transition of operatorship of PRL 15 to Total and the reduction in activity in the Company’s other license areas. As at September 30, 2016, the Company has a provision of $5.6 million (December 2015 - $10.9 million, September 2015 – nil) in relation to retrenchment of employees and onerous telecommunications contracts. In addition to these costs, the Company has a provision at September 30, 2016 for onerous rig rental of $21.3 million (December 2015 - $48.5 million, September 2015 - nil). During the nine months ended September 30, 2016, the PRL 15 Joint Venture approved an additional appraisal well, Antelope-7, and the temporary assignment of a rig contracted to the Company to Total for the drilling of Antelope-7, resulting in a $9.1 million reduction to the previously provided for onerous rig contract and a reversal of the previously expensed exploration costs, which is included in the consolidated income statement for the nine months ended September 30, 2016.

 

8.

Secured loans

 

		September 30,				December 31,				September 30,
		2016				2015				2015
		$				$				$
Secured loan (Credit Suisse)			-				130,000,000				-
Secured loan (ANZ)			290,000,000				-				-
Total secured loans			290,000,000				130,000,000				-

 

Credit Suisse led Syndicated Secured Loan Facility

On June 17, 2014, the Company entered into a $300.0 million syndicated, senior secured capital expenditure facility through a consortium of banks led by Credit Suisse A.G. (“Credit Suisse Facility”). The facility was supported by the participating lenders Commonwealth Bank of Australia, Australia and New Zealand Banking Group (PNG) Limited, UBS A.G., Macquarie Group Limited, Bank of South Pacific Limited, Westpac Bank PNG Limited, The Bank of Tokyo-Mitsubishi UFJ and Societe Generale S.A. The facility was secured by the Company’s subsidiaries’ assets and had an annual interest rate of LIBOR plus 5% and was due to mature at the end of 2016.

 

During the nine months ended September 30, 2016, the total interest expense under this facility included in finance costs was $3.2 million (September 2015 - nil). In addition, financing costs relating to this facility of $1.2 million were expensed during the nine months ended September 30, 2016 (September 2015 - $10.5 million).

 

The syndicated secured loan facility was repaid in full and replaced by the ANZ Facility during the quarter ended June 30, 2016.

 

 

InterOil Corporation Notes to Condensed Consolidated Interim Financial Statements (Unaudited, Expressed in United States dollars)

 

8.

Secured loans (cont’d)

 

ANZ Facility

On April 21, 2016, the Company entered into the ANZ Facility which replaced the Credit Suisse Facility. The ANZ Facility has an annual interest rate of LIBOR plus 6% and terminates on December 31, 2017. Other lenders in the syndicate include Westpac PNG Limited, Bank of South Pacific Limited, Intesa Sanpaolo SPA, Credit Suisse AG, Société Générale, Morgan Stanley and UBS AG. Security for the ANZ Facility includes certain of the Company’s subsidiaries’ assets. Draw downs of $290.0 million were made under the facility during the nine months ended September 30, 2016 and part of the drawings were used to repay the loan under Credit Suisse Facility in full.

 

As at September 30, 2016, the Company was in compliance with the applicable debt covenants, which include a defined calculation for gearing not to exceed 60% at any time, and a requirement that the equity does not fall below $500.0 million at any time. In addition, the covenants include agreed expenditure limits tested for the six months period ending each quarter and a requirement to obtain consent to redraw the facility after receipt of the interim certification payment under the Total SSA.

 

During the nine months ended September 30, 2016, the total interest expense under the ANZ Facility included in finance costs was $7.0 million (September 2015 - nil). In addition, financing costs relating to this facility of $10.3 million were expensed during the nine months ended September 30, 2016 (September 2015 - nil).

 

9.

Share capital and reserves

 

The authorized share capital of the Company consists of an unlimited number of common shares with no par value and an unlimited number of preferred shares, of which 1,035,554 Series A preferred shares are authorized. Each common share entitles the holder to one vote.

 

Common shares - Changes to issued share capital were as follows:

 

		Number of shares				$
January 1, 2015			49,414,801				991,693,780
Shares issued on vesting of restricted stock units under Stock Incentive Plan			158,010				8,664,540
December 31, 2015			49,572,811				1,000,358,320
Shares issued on vesting of restricted stock units under Stock Incentive Plan			574,543				23,529,781
September 30, 2016			50,147,354				1,023,888,101

 

Preferred shares - No preferred shares are issued, or were issued at any time during the nine months ended September 30, 2016 (September 2015 – nil).

 

10.

Interest revenue

 

		Quarter ended								Nine months ended
		September 30,				September 30,				September 30,				September 30,
		2016				2015				2016				2015
		$				$				$				$
Interest income on short term deposits			26,001				228,466				90,144				1,204,715
Interest accretion income on receivable from Total (note 4)			10,876,548				11,015,238				33,338,200				33,053,681
Adjustment due to change in timing of estimated cash flows on receivable from Total (note 4)			(3,835,913	)			-				(36,617,836	)			(25,878,655	)
Interest revenue			7,066,636				11,243,704				(3,189,492	)			8,379,741

 

 

InterOil Corporation Notes to Condensed Consolidated Interim Financial Statements (Unaudited, Expressed in United States dollars)

 

11.

Finance costs

 

		Quarter ended								Nine months ended
		September 30,				September 30,				September 30,				September 30,
		2016				2015				2016				2015
		$				$				$				$
Interest expense on Credit Suisse Secured Loan			-				-				3,201,211				-
Interest expense on ANZ Secured Loan			4,620,391				-				6,951,540				-
Interest expense on Convertible Notes			-				481,236				-				1,443,709
Interest accretion on Convertible Notes			-				1,026,110				-				3,033,129
Financing fees on Credit Suisse Secured Loan			-				1,916,667				1,216,395				10,513,907
Financing fees on ANZ Secured Loan			968,334				-				10,255,417				-
Other finance costs			5				6,006				6,024				6,006
Finance costs			5,588,730				3,430,019				21,630,587				14,996,751

 

12.

Administrative and general expenses

 

		Quarter ended								Nine months ended
		September 30,				September 30,				September 30,				September 30,
		2016				2015				2016				2015
		$				$				$				$
Stock compensation		5,554,037				814,559				21,141,813				2,684,053
Salaries and other employee related expenses			6,585,362				3,101,317				25,568,191				8,683,546
Computing and communications			343,395				36,968				2,242,735				2,978,911
Flights, charters and logistics			828,118				583,140				1,896,274				2,019,288
Others			990,639				1,566,894				4,110,863				3,396,074
Administrative and general expenses			14,301,551				6,102,878				54,959,876				19,761,872

 

Increase in stock compensation and salaries and other employee related costs for the nine months ended September 30, 2016 was mainly due to the restricted stock units granted and other employee entitlements in connection with the approval by the Board of the proposal for Exxon to acquire all of the outstanding common shares of the Company.

 

13.

Loss per share

 

Stock options and restricted stock units totaling 657,272 common shares at prices ranging from $13.12 to $67.74 were outstanding as at September 30, 2016.

 

		Number of shares				Number of shares
Potential dilutive instruments outstanding		September 30, 2016				September 30, 2015
Employee stock options			60,000				210,000
Employee Restricted Stock			597,272				195,205
2.75% Convertible notes			-				732,004
Total stock options/shares outstanding			657,272				1,137,209

 

 

InterOil Corporation Notes to Condensed Consolidated Interim Financial Statements (Unaudited, Expressed in United States dollars)

 

14.

Commitments and contingencies

 

(a) Exploration and debt commitments

 

Payments due by period contractual obligations are as follows:

 

		Total				Less than 1 year				1-2 years				2-3 years				3-4 years				4-5 years				More than 5 years
		'000				'000				'000				'000				'000				'000				'000
Petroleum prospecting and retention licenses			280,281				418				84,563				-				195,300				-				-
Secured loans			293,645				293,645				-				-				-				-				-
Other non-current liabilities			96,000				-				96,000				-				-				-				-
			669,926				294,063				180,563				-				195,300				-				-

 

The PPL and PRL amounts represent the Company’s commitments on these licenses as at September 30, 2016. On March 6, 2014, the Company’s applications for new PPLs were approved and included new license commitments. On May 6, 2016, the Company’s applications to vary the PPLs years three and four commitments were approved. The original commitments and the approved variations require the Company to spend an additional $252.5 million over the remainder of their six-year terms.

 

Further, the terms of grant of PRL 39 requires the Company to spend $27.8 million on the license area by the end of 2018.

 

(b) Contingencies:

 

From time to time the Company is involved in various claims and litigation arising in the course of its business. While the outcome of these matters is uncertain and there can be no assurance that such matters will be resolved in the Company’s favor, the Company does not currently believe that the outcome of adverse decisions in any pending or threatened proceedings or any amount which it may be required to pay by reason thereof would have a material adverse impact on its financial position, results of operations or liquidity.

 

During April 2016, the Company received notice from Puma Energy Pacific Holdings Pte Ltd (Puma) of a claim in relation to sludge which Puma assert was found in the tanks of the refinery at the time the refinery was sold to Puma in June 2014. During the quarter ended September 30, 2016, without any admission of liability by InterOil, the parties agreed to settle the claim for an amount of $7.5 million.

 

15.

Subsequent events

 

On July 21, 2016, the Company and Exxon announced that they had entered into an arrangement agreement under which Exxon agreed to acquire all of the outstanding common shares of the Company pursuant to a statutory plan of arrangement under the Business Corporations Act (Yukon).

 

Under the terms of the transaction, holders of common shares of the Company would receive, in exchange for each common share (including each common share issued to holders of restricted share units pursuant to the transaction):

 

·

US$45.00 of shares of Exxon, calculated based on the volume weighted average price of Exxon’s shares on the New York Stock Exchange for the ten (10) consecutive trading days ending on the second trading date immediately prior to closing of the transaction; and

 

·

the right to receive a contingent resource payment equal to an additional cash payment of $7.07 per common share for each tcfe gross resources certification of the Elk-Antelope field above 6.2 tcfe, up to a maximum of 10 tcfe.

 

  

InterOil Corporation Notes to Condensed Consolidated Interim Financial Statements (Unaudited, Expressed in United States dollars)

 

15.

Subsequent events (cont’d)

 

On September 21, 2016, the Company’s shareholders, stock option holders and restricted stock unit holders voted to approve the transaction. The transaction also required approval by the Supreme Court of Yukon and on October 7, 2016, the Supreme Court of Yukon approved the transaction with Exxon. Subsequent to such approval, a shareholder, Mr. Phil Mulacek, filed a notice of appeal. On November 4, 2016, the Court of Appeal of Yukon upheld the appeal and overturned the Supreme Court of Yukon’s approval of the transaction.

 

The Company is currently in discussions with Exxon with respect to extending the outside date of the proposed transaction, which is currently December 14, 2016. The Company is also considering options to file for leave to appeal to the Supreme Court of Canada. If the transaction is not effected prior to the outside date, either party has the right to terminate the arrangement agreement. No assurances can be made that the Company and Exxon will agree on an extension of the outside date and/or that the Company will be able to effect the transaction with Exxon under the arrangement agreement. On completion of the transaction, financial advisor fees will become payable.

 

In certain circumstances, the termination of the arrangement agreement entered into with Exxon may result in the Company being required to pay a termination fee of $67 million. The obligation to pay the termination fee will arise where the arrangement agreement is terminated inter alia:

 

(a)

by Exxon, because of a change to the InterOil board’s recommendation of the arrangement, except where the change in recommendation resulted from the occurrence of an ExxonMobil Material Adverse Effect (as defined in the arrangement agreement);

 

(b)

by the Company in order to enter into a Superior Proposal (as defined in the arrangement agreement); or

 

(c)

by Exxon, as a result of a breach of InterOil’s non-solicitation covenants (as set out in the arrangement agreement).