Some useful rationality in a hyper nervous market
IOC: Pre-Announces Profitable 3Q08, Expects LNG Agreement in 4Q
- InterOil has announced that it expects to report a profitable 3Q08, well ahead of our current projections and the second straight profitable quarter. For context, our current 3Q08 EPS estimate is a loss of $0.14 per share. The company noted that its refinery and downstream operations have continued to operate profitably and in-line with internal expectations, despite the severe volatility across commodity and financial markets.
- The company plans to report 3Q results on November 10. On the operational side, InterOil is preparing to commence the Antelope-1 appraisal well in the next few days. The well will target the limestone section that was intersected in the Elk-4 well, which posted a flow rate of 105 MMcf/d of gas and 2,000 bpd of condensate, the highest flow rate for a gas well in PNG.
- Lastly, InterOil stated that the closing of the LNG project agreement with the PNG government is expected to take place in 4Q08. Earlier this week, PNG’s prime minister, Sir Michael Somare, confirmed this timetable during discussions in Rome (InterOil management was present) that led to the signing of an agreement between PNG and the Italian integrated major ENI (E/$38.98). ENI plans to make a sizable investment in oil and gas exploration in PNG, and given its obvious interest in developing the country’s energy resources, we believe it could be a logical candidate to consider partnering with InterOil on the LNG project and/or other projects.
- Following these positive announcements, we envision a number of upcoming catalysts for InterOil.
- First, and not necessarily in this particular order, we believe that the Elk-4 reservoir tests should provide the engineers with enough data to refine (and increase) the resource estimate for the Elk/Antelope structure, which we believe should most likely support a full two-train LNG development. We anticipate reservoir analysis to be completed around the end of October.
- Second, as noted above, the LNG project agreement is set to be signed by year-end.
- Third, we would anticipate a strategic partner entering into a multi-phased transaction to acquire 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. With additional capital, InterOil has indicated its intention to accelerate the pace of drilling by adding an additional development drilling rig and up to two workover rigs. We reiterate our Strong Buy rating.
We have not a whole lot to add..