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Raymond James update on InterOil 14/8

August 14th, 2008 · No Comments

Not a whole lot of news, but still well worth reading.

  • InterOil posted operating earnings per diluted share of $0.14 in 2Q08, excluding gains of $6.5 million on the sale of license interests and $3.7 million relating to waived investor conversion rights, handily beating our estimate of a loss of $0.20.
  • The quarterly beat was driven by strong margins in the refining segment and nearly zero exploration expense, partially offset by higher G&A costs. Reported net income was $0.40 per share.
  • Strong results from the refining and downstream segments drove record EBITDA in 2Q08. Despite weak global crack spreads in the face of escalating crude prices, the refinery delivered record EBITDA of $16.3 million (equating to EBITDA margins of $8.27/Bbl), reflecting continued reductions in fuel and operating costs.
  • Downstream EBITDA also set a record at $7.9 million, driven by increased domestic demand and favorable Import Parity Price (IPP) movements. After fine-tuning our top-line and cost projections, while still conservatively assuming a large amount of exploration expense each quarter, we are slightly narrowing our net loss expectations in 2008 and 2009 (shown below).
  • Earlier this month, InterOil reported an impressive preliminary flow rate of 63 MMcf/d of gas at Elk-4, alongside a strong condensate flow rate of 1,130 bpd. On the conference call, management laid out a timetable for collecting final flow rate data in the next two weeks, followed by third-party resource appraisals set to conclude within six to eight weeks. After final completion, the rig will move onto the next drilling location, Antelope-1.
  • Management also reaffirmed that they are observing positive indicators of matrix porosity and permeability in Elk-4, resulting in strong deliverability, thereby firmly supporting the company’s LNG project.
  • This was an exceptionally strong quarter for InterOil, supporting our view of the value within its refinery and downstream business segments. That said, the market’s continued focus will be on the testing of Elk-4, which should be completed over the next two weeks and paves the way for a number of upcoming catalysts in the back half of the year.
  • Our target price of $65.00 is based on our conservatively risked NAV estimate of $63.17. We reiterate our Strong Buy rating.
  • In its latest drilling update, released earlier this month, InterOil reported a preliminary flow rate of 63 MMcf/d following the completion of its Elk-4 well. This exceptional flow rate, producing from a relatively small (4½ inch) borehole, represented merely the first gas flows from the well since the company installed production tubing.
  • The company is currently acid-stimulating the well, which combined with the installation of additional testing equipment used to increase the overall flow capacity, could further enhance the productivity of the well.
  • Another key data point coming from the latest update was the strong condensate flow rate of 1,130 barrels per day. We remain highly encouraged by the natural gas/liquids composition, with the condensate level reaching an estimated 18 Bbls/MMcf for the entire  section.
  • In fact, we believe that this high liquid content points to the prospects of developing a liquids-stripping plant, which would accelerate near-term cash flow and further enhance the value of the overall project.
  • On its conference call, the company disclosed that it is currently studying various options for monetizing the high condensate levels at the well; and we could see a more developed roadmap over the next two months.
  • The final completion of production testing at Elk-4, anticipated within the next two weeks, should pave the way for a number of upcoming catalysts for InterOil (not necessarily in this particular order):
  • o  We believe that this down-dip test of the reservoir should provide the engineers with enough data to refine (and increase) the resource estimate for the Elk/Antelope structure, which we believe will ultimately support a full two train LNG development. The results of the third party analysis should be completed by the end of October.
  • o  This production test should enable the PNG government to move ahead with the LNG project agreement.
  • o  We would anticipate a strategic partner stepping up to the plate and taking an interest in Elk/Antelope, the LNG plant, and an LNG offtake agreement – aligning its interests with InterOil across the range of the company’s business segments. This transaction has the potential to create an implied “industry” valuation several-fold higher than the market’s current valuation of InterOil shares. On the conference call, management noted that the financial structure of a strategic partnership may be phased over a multi-year period, with both upfront and future cash payments, thereby enabling future payments to be based on more thorough assessments of the resource potential.
  • o  The company plans on moving the rig onto the next drilling location and spudding its next prospect, Antelope-1. The prospect, located 2.5 miles (4 km) south of Elk-1 and structurally up-dip from Elk-4, will target a seismically indicated limestone reef at  approximately 5,577 ft. (1,700 m) depth. The company has targeted total depth of 8,202 ft. (2,500 m).
  • As supported by this recent production test at Elk-4, we believe that InterOil has discovered several billion dollars worth of hydrocarbons, while the enterprise value of the company remains under $1 billion. From a valuation standpoint, a key point we would emphasize is that our calculated risked NAV of $63.17 per share (shown on page 3) still does not include any credit for  resource potential at any other prospects, of which approximately 40 have already been identified.
  • Furthermore, we believe that there is significant upside to the previously estimated range of 2.5 to 11.3 Tcf for  recoverable gas reserves, the midpoint of which is incorporated in our NAV. We are increasingly confident that $63.17 should be seen as the floor for InterOil’s value, not a “best guess” and certainly not a ceiling.

All good stuff.

Tags: IOC · Research Reports