Another analyst bullish on InterOil. It’s not hard to understand why…
Monness Crespi Hardt & Co. Inc 16 Sept. 2008
- Interoil has made important strides over the last few months and we reiterate our May 30 statement that IOC is on the threshold of establishing a profitable integrated oil and gas operation in Papua New Guinea with an on-going attractive exploration potential.
- In our opinion, both the near term and longer term potentials are quite attractive and investors who understand the oil and gas business should be accumulating the common shares at current price levels. On August 13, management reported a second quarter profit if $15.6 million equal to $0.40 per share, by far the company’s most profitable quarter. More important, the company’s local oil refining and marketing operations reported a net profit of $13 million ($0.32 per share) and cash flow before interest costs of $21.0 million ($0.52 per share).
- We anticipate third quarter results will be in the same general area as the second quarter. On September 4, management reported completion of the Elk 4 well which tested a record daily flow rate of 105 million cubic feet of natural gas. It would appear that the potential gas reserves in the Elk 4 well combined with those in the previously completed Elk 1 well should be more than sufficient to supply the first train in the proposed LNG plant in Papua New Guinea and the combined reserves may well exceed the nine trillion cubic feet required to back up a two train installation.
- In the August IOC conference call for analysts, management stated that a strategic partner in the proposed LNG plant is likely to come aboard before year end. If and when a well financed strategic surfaces, Interoil would gain considerable additional creditability. The drilling rig used at the Elk 4 well is currently being moved about 1.7 miles to the designated site for Antelope 1.
- We anticipate this well should be spudded in late September or early October at a location that is considerably up dip from the Elk 4 location. This well has been engineered to accommodate surface casing substantially larger than the 18 5/8 inch casing in Elk 4. It is likely that some information on the Antelope 1 well should be forthcoming before year end.
- We believe the market has failed to recognize numerous favorable developments that have made Interoil much stronger financially and operationally.
- As we see it, IOC’s modest refining and marketing operations will generate cash flow of about $40-$50 million in 2008 based on a refinery throughput equal to only 50% of its throughput capacity. We believe the odds favor some improvement next year and at some point product sales into the large local export market could increase throughput with considerable favorable impact on profitability.
- With respect to drilling activity, IOC now has two significant natural gas discoveries in the Elk 1 and Elk 4 wells. With no market outlets this stranded gas might be considered to have rather nominal value. There are already two significant LNG plants beyond the preliminary stage as well as a new comer in the wings with the best technology to convert natural gas to liquids. Therefore, it is realistic to expect natural gas resources are becoming much more valuable. With current and presumably future LNG selling for $15-$20 per MCF in Southeast Asia, it is not overly ambitious to anticipate a potential value for reserves in the ground of $1.00 per MCF which would equate to considerable present value.
- For a small company like Interoil with a fully diluted equity of about 40 million shares such an in ground valuation could be substantial. Recently, (September 8, 2008) Conoco Phillips announced investment of $8 billion in a somewhat similar LNG project in Australia that could provide some insight into the framework that might evolve in Papua New Guinea.
- All of the above factors point to an enhanced financial situation at IOC with a realistic prospect for major investor interest developing with either or both a strategic LNG partner and more favorable drilling results from the Antelope 1 well.
- Longer term we look forward to an expanded drilling program that could test the additional 35 or more geological prospects that have been identified for future testing. On balance it appears that much of the market risk has been squeezed out of the IOC common shares with the open ended potential looking better.
Hard to disagree with..