InterOil Announces 2012 Financial and Operating Results

February 27, 2013

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Port Moresby and Houston, TX — InterOil Corporation (NYSE: IOC) (POMSoX: IOC) (“InterOil” or the “Company”) today announced financial and operating results for the fourth quarter and full year ended December 31, 2012.

Year End 2012 Highlights and Recent Developments

  • During the year, InterOil drilled both the Triceratops-2 and Antelope-3 wells to total depth and completed initial logging and testing. The Triceratops-2 well established the Triceratops field as the third significant discovery to date on the Company’s licenses in Papua New Guinea. The Antelope-3 well results compare favourably with the Antelope-1 and Antelope-2 wells. The GLJ Report, prepared by our independent qualified reserves evaluator, effective as of December 31, 2012, indicated a 10% increase to 10.3 trillion cubic feet of gas equivalents (Tcfe) in the gross contingent best case resource estimate on our licenses in PNG compared to the 2011 year-end estimate of GLJ of 9.4 Tcfe.
  • On November 16, 2012, we were notified by the Prime Minister of Papua New Guinea Hon. Peter O’Neill that the National Executive Committee had conditionally approved our LNG development project in the Gulf Province. We believe that this decision clears the way for us to complete the LNG partnering process and proceed with our plans for the development of an LNG plant in the Gulf Province with initial planned output of a minimum of 3.8 million tonnes per annum.
  • Net profit for the quarter ended December 31, 2012 was $18.5 million, which contributed to our achievement of an annual net profit for the year ended December 31, 2012 of $1.6 million. Our comparative profit for the annual period in 2011 was a net profit of $17.7 million. The operating segments of Corporate, Midstream Refining and Downstream collectively returned a net profit for the year of $61.2 million. The development segments of Upstream and Midstream Liquefaction yielded a net loss of $59.6 million.
  • Subsequent to year end, on January 24, 2013, we announced that we have advised parties with which we have been in discussions that the final binding bid solicitation period for the LNG partnering process currently being undertaken will close on February 28, 2013. Our Board of Directors intends to meet our advisors during March 2013 for the purpose of evaluating bids received and selecting our partner(s) for the development of the LNG Project utilizing gas from the Elk and Antelope fields.

Phil E. Mulacek, InterOil Corporation Chief Executive Officer, commented,
“The recent approval of our 3.8 mtpa LNG project in the Gulf Province by the National Executive Council of PNG paves the way to completing our LNG partnering process, including a sell down of our interest in the Elk and Antelope fields. The success of our delineation drilling at Triceratops and Antelope has positively impacted our 2012 year-end resource estimate. Our prospect inventory is maturing and we anticipate that it will support our goal of a multi-year, multi-well exploration program. I am pleased to confirm that the fifth annual resource evaluation of the Elk and Antelope fields, and our first estimate at the Triceratops field, continues to support our development plans. We look forward to progressing commercialization of these resources. We believe that these achievements, combined with a successful completion of our LNG partnering process, support our continued growth and operational success.”

Corporate Financial Results
InterOil recorded a net profit for the year ended December 31, 2012 of $1.6 million, compared with a profit of $17.7 million for the same period in 2011, a decrease of $16.1 million. The operating segments of Corporate, Midstream Refining and Downstream collectively returned a net profit for the year of $61.2 million. The development segments of Upstream and Midstream Liquefaction yielded a net loss of $59.6 million for an aggregate net profit of $1.6 million.

EBITDA for the year ended December 31, 2012 was $35.9 million, a decrease of $14.5 million compared to EBITDA of $50.4 million for the same period in 2011, the decrease was mainly due to a $25.1 million decrease in foreign exchange gain, due to the PGK being relatively stable in the year ended December 31, 2012.

Total revenues for the year ended December 31, 2012 were $1,320.6 million compared with $1,118.9 million and $807.0 million respectively for the same periods in 2011 and 2010. This increase in the year ended 2012 compared to the same period in 2011 was due to higher sales volumes and higher export prices during the period. The total volume of all products sold by us was 8.5 million barrels for fiscal year 2012, compared with 7.4 million barrels in 2011.

Business Segment Results

Upstream
During the year, InterOil drilled and tested the Triceratops-2 well in Petroleum Prospecting License (“PPL”) 237 to confirm the presence of gas and condensate, and test for the presence of reefal carbonate reservoir. Following successful flow from DST#9 of 27 MMSCFPD on June 6, 2012, the Triceratops-2 well was declared a discovery on June 14, 2012 by Department of Petroleum and Energy (the “DPE”). Triceratops seismic data indicates there is a large attic in terms of height and areal extent to the south, west and northwest of the Triceratops-2 well, which will be our focus during future seismic acquisition and well programs in this field.

On April 18, 2012, InterOil signed a binding heads of agreement (HOA) with Pacific Rubiales Energy (PRE) for PRE to be able to earn a 10.0% net (12.9% gross) participating interest in the PPL 237 onshore PNG, including the Triceratops structure located within that license. On November 29, 2012, we executed the PRE joint venture operating agreement and related documents associated with the Farm-In Agreement with PRE. Subsequent to year end, on January 24, 2013, the DPE approved and registered the transfer of interest in PPL 237 to PRE. The PPL 237 JV Operating Committee established with PRE will review and approve the forward work program, and submit an application for a PRL over the Triceratops discovery.

During 2011, site-specific engineering for the land based modular LNG and fixed-floating LNG facilities were undertaken along with other pre-investment in the LNG Project to lower risks to potential strategic partners and to secure our LNG Project timeline and costs.

On November 25, 2011, a Heads of Agreement was signed with Gunvor Singapore Pte. Ltd. for the supply of one mtpa of LNG from the LNG Project in Papua New Guinea. On December 2, 2011, a further Heads of Agreement was signed with ENN Energy Trading Company Ltd. of China, for the supply of one to one and one half mtpa of LNG from the LNG Project. The Heads of Agreements, while not binding, provide exclusivity on the LNG volumes, during negotiation of the definitive agreement, and set out the basis upon which the parties intend to negotiate and document terms for the purchase and sale of LNG commencing in 2015.

The Company’s Midstream Liquefaction business generated a loss of $15.5 million in 2011 compared with a loss of $8.4 million a year ago. The negative variance is largely due to an increase in office, administration and other expenses for the year resulting from increased activities undertaken to negotiate long term LNG offtake agreements, pre-FEED work being undertaken for the LNG Project’s proposed land based liquefaction and fixed-floating liquefaction facilities, and also further the discussions with the PNG State to achieve requisite approvals to complete the LNG project.

During the fourth quarter, InterOil drilled the Antelope-3 well to total depth and completed the initial wireline logging program. The top of the reservoir at the Antelope-3 well was penetrated at a depth of 5,328 feet (1,624 meters). This was 217 feet (66 meters) above the pre-drill estimate and 92 feet (28 meters) higher than the Antelope-1 well. The preliminary independent analysis of the wireline log results demonstrated a carbonate reservoir (limestone and dolomite) with similar reefal reservoir character and quality as the offset Antelope-1 and Antelope-2 wells.

InterOil continued appraising its exploration licenses during the year by acquiring Phase 3 seismic data on PPL 236 in addition to airborne gravity data acquired over PPL 236 and PPL 237. Analysis of the newly acquired gravity data generated additional leads to be assessed for further seismic acquisition. Proposed well locations have currently been selected for Tuna and Wahoo prospects. Given the success of the Triceratops-2 well and the better than expected results of the Antelope-3 well, we have had discussions with the DPE on our future focus and priorities. We believe that a clear mutual objective is to focus on progressing the LNG Project. To progress development of our core assets, we have applied for variations to modify the well commitments for PPL 236 and PPL 238. We are awaiting formal approval of variations in relation to our commitments.

InterOil’s Upstream business realized a net loss of $56.8 million in 2012 compared to a loss of $49.1 million in the comparable period a year ago. The increase in the loss in 2012 was mainly due to higher interest expense due to an increase in inter-company loan balance which was partially offset by reduced exploration costs incurred for seismic activity.

InterOil’s Annual Information Form includes the details of the independent engineering evaluation prepared by GLJ Petroleum Consultants Ltd. (2012 GLJ Report), which evaluated the Company’s contingent resources at the Elk, Antelope and Triceratops fields in Papua New Guinea effective as at December 31, 2012, and was prepared in accordance with the definitions and guidelines in the COGE Handbook and National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities (NI 51-101).

The 2012 GLJ Report provides a best case estimate of contingent resources of 9.45 trillion cubic feet (Tcf) of natural gas and 143.6 million barrels of condensate (MMBbls), or 10.3 trillion cubic feet of natural gas equivalents (Tcfe).

This compares to GLJ’s year-end 2011 best case contingent resources estimate of 8.59 Tcf of natural gas and 128.9 MMBbls of condensate, or 9.4 Tcfe. The 2012 GLJ Report noted an increase of 10%, or 157.8 MMBOE, in the combined gross resource estimate for Elk, Antelope and Triceratops fields from the 2011 year-end estimate of Elk and Antelope fields. All resources estimated in the 2012 GLJ Report are classified as contingent resources – economic status undetermined.

Midstream Refining
Total refinery throughput for the year ended December 31, 2012 was 24,483 barrels per operating day, compared with 24,856 barrels per operating day during 2011. Capacity utilization for 2012, based on 36,500 barrels per day operating capacity, was 58% compared with 54% in 2011.

On October 16, 2012, the Company entered into a five year amortizing $100.0 million secured term loan facility with BNP, BSP, and ANZ. The loan is secured over the fixed assets of our refinery and bears interest at LIBOR plus 6.5%. On November 9, 2012, part of the borrowings under the new term loan facility was used to repay all outstanding amounts under the term loan granted by OPIC.

The Company’s Midstream Refining operations generated a net loss of $2.9 million in 2012 versus a profit of $46.7 million in the prior year. The $49.6 million negative variance is primarily due to a decrease in gross margin resulting from negative crude and product price movements and a decrease in foreign exchange gains compared to the previous year, which were partially offset by an increase in income tax benefits for the 2012 year.

Midstream Liquefaction
Throughout the year, investment bankers led by Morgan Stanley & Company LLC, Macquarie Capital (USA) Inc. and UBS AG continued working on the bid process to seek a strategic partner to acquire an interest in the Elk and Antelope fields, the LNG Project and certain exploration licenses. Interested parties include major oil companies, national oil companies, and global utilities.

On November 16, 2012, we were notified by the Prime Minister of Papua New Guinea Hon. Peter O’Neill that the NEC had conditionally approved our LNG development project in the Gulf Province. We believe that this decision clears the way for us to proceed with our plans for the development of an LNG plant in the Gulf Province with initial planned output of a minimum of 3.8 million tonnes per annum. The PNG Cabinet also approved the establishment of the Ministerial Gas Committee comprised of key economic ministers to fast track commercialization of the LNG Project.

Subsequent to year end, on January 24, 2013, we announced that we have advised potential bidders with whom we have been in discussions that the final binding bid solicitation period for the partnering process currently being undertaken will close on February 28, 2013. Our Board of Directors intends to meet our advisors during March 2013 for the purpose of evaluating bids received and selecting our partner(s) for the development of the LNG Project utilizing gas from the Elk and Antelope fields.

The Company’s Midstream Liquefaction business generated a loss of $2.8 million in 2012 compared with a loss of $15.5 million a year ago. The positive variance is largely due to a decrease in office, administration and other expenses resulting from lower management expenses and share compensation costs related to the midstream facilities of the LNG Project development which are not capitalized.

Downstream
The PNG economy continued to grow strongly throughout 2012 largely due to resource development projects, which has also led to growth in our aviation and retail businesses within our downstream segment. Total Downstream sales volumes for 2012 were 752.5 million liters, compared with 678.0 million liters in 2011.

Investments have been made over the last three years in new electronic systems for both pumps and the forecourt control units to support the further development of this business. During 2012, one new retail site was opened as well as a commercial truck stop site. One existing retail site was purchased to secure tenure, and additional land was purchased for a future retail site.

InterOil’s Downstream operations generated a net profit of $32.6 million in 2012, an improvement of $21.0 million versus a profit of $11.6 million in the previous year. Gross margins increased in 2012 as compared to the prior year mainly due to an increase in domestic sales volumes resulting from various development projects being undertaken in Papua New Guinea.

Corporate
InterOil Corporate PNG Limited is incorporated under the laws of PNG, as a 100% subsidiary of InterOil Corporation to employ all corporate staff in PNG and to capture their associated costs. In addition, this entity has taken over the operation of the Napa Napa camp and all costs associated with the operation of the camp are now captured in this entity. All costs incurred by this entity will be recharged to relevant InterOil entities based on an equitable driver basis. This entity began transacting in October 2012.

The Corporate segment generated a net profit of $33.1 million in 2012, compared to a net profit of $21.9 million in 2011. The positive variance is largely due to higher interest income resulting from an increase in inter-company loan balances.

Forward Looking Statements
This press release includes “forward-looking statements” as defined in United States federal and Canadian securities laws. All statements, other than statements of historical facts, included in this press release that address activities, events or developments that the InterOil expects, believes or anticipates will or may occur in the future are forward-looking statements, including in particular further seismic-related exploration activities, development activities, the ability to attract a strategic LNG partner and complete the LNG partnering process and the timing of such process, the construction and development of the proposed LNG project, the characteristics of our properties, the ability to commercially develop our resources, anticipated financial conditions and performance, business prospects, strategies, regulatory developments, the ability to obtain financing on acceptable terms, the ability to identify drilling locations and the ability to develop reserves and production through development and exploration activities. Statements relating to ‘resources’ are forward looking, as they involve the applied assessment, based on certain estimates and assumptions, that the resources described exist in the quantities estimated. These statements are based on certain assumptions made by the Company based on its experience and perception of current conditions, expected future developments, the terms of agreements with its joint venture partners and other factors it believes are appropriate in the circumstances. No assurances can be given however, that these events will occur. Actual results will differ, and the difference may be material and adverse to the Company and its shareholders. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the Company, which may cause our actual results to differ materially from those implied or expressed by the forward-looking statements. Some of these factors include the risk factors discussed in the Company’s filings with the Securities and Exchange Commission and on SEDAR, including but not limited to those in the Company’s Annual Report for the year ended December 31, 2012 on Form 40- F and its Annual Information Form for the year ended December 31, 2012. In particular, there is no established market for natural gas or gas condensate in Papua New Guinea and no guarantee that gas or gas condensate from the Elk and Antelope fields will ultimately be able to be extracted and sold commercially.

Oil and Gas and Resource Information
InterOil currently has no production or reserves as defined in Canadian NI 51-101 or under the definitions established by the United States Securities and Exchange Commission.

The resources information set forth in this press release is based on the 2012 GLJ Report, which was prepared in accordance with NI 51-101 and is included in InterOil’s annual information form for the year ended December 31, 2012, a copy of which has been filed on SEDAR (www.sedar.com) and on InterOil’s website (www.interoil.com).

Contingent resources are those quantities of natural gas and condensate estimated, as of a given date, to be potentially recoverable from known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. The economic status of the resources is undetermined and there is no certainty that it will be commercially viable to produce any portion of the resources. The following contingencies must be met before the resources can be classified as reserves: (i) sanctioning of the facilities required to process and transport marketable natural gas to market, (ii) confirmation of a market for the marketable natural gas and condensate and (iii) determination of economic viability. Although a final project has not yet been sanctioned, pre-FEED studies are ongoing for the LNG Project and FEED studies conducted for the Condensate Stripping Project as options for potential monetization of the gas and condensate.

The “low” estimate is considered to be a conservative estimate of the quantity that will actually be recovered. It is likely that the actual remaining quantities recovered will exceed the low estimate. With the probabilistic methods used, there should be at least a 90 percent probability (P90) that the quantities actually recovered will equal or exceed the low estimate. The “best” estimate is considered to be the best estimate of the quantity that will actually be recovered. It is equally likely that the actual remaining quantities recovered will be greater or less than the best estimate. With the probabilistic methods used, there should be at least a 50 percent probability (P50) that the quantities actually recovered will equal or exceed the best estimate. The “high” estimate is considered to be an optimistic estimate of the quantity that will actually be recovered. It is unlikely that the actual remaining quantities recovered will exceed the high estimate. With the probabilistic methods used, there should be at least a 10 percent probability (P10) that the quantities actually recovered will equal or exceed the high estimate.

The accuracy of resource estimates is in part a function of the quality and quantity of the available data and of engineering and geological interpretation and judgment. Other factors in the classification as a resource include a requirement for more delineation wells, detailed design estimates and near term development plans. The size of the resource estimate could be positively impacted, potentially in a material amount, if additional delineation wells determined that the aerial extent, reservoir quality and/or the thickness of the reservoir is larger than what is currently estimated based on the interpretation of the seismic and well data. The size of the resource estimate could be negatively impacted, potentially in a material amount, if additional delineation wells determined that the aerial extent, reservoir quality and/or the thickness of the reservoir are less than what is currently estimated based on the interpretation of the seismic and well data.

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.

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