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Raymond James update on InterOil 2 March

March 2nd, 2009 · 3 Comments

Update from RayJay..

IOC: Record Flow at Antelope; Merrill Settlement Opens Door to New LNG Partners Bringing the Antelope-1 well to an extremely successful conclusion, InterOil announced a record flow test totalling 382 MMcf of gas and 5,000 barrels of condensate per day.

This is more than three times he flow rate seen from earlier tests at Elk-1 or Elk-4. Moreover, the flow test was performed with only 30% of the choke capacity open. Also, Antelope-1 and prior wells confirm a combined productive capacity in excess of the amount needed to support a single LNG train (500 MMcf/d).

Next on deck: The resource estimate currently being analyzed by a duo of third-party engineering firms, expected to be released in the next few weeks, possibly concurrent with the 4Q08 results in late March.

In other news, InterOil reached a settlement with Merrill Lynch through which the bank has agreed to step out from its former partnership role (absolving its voting rights) in the LNG project. As compensation, InterOil issued 652,931 shares to Merrill Lynch/Bank of America – valued at $12.9 million as of Friday’s close, or about 2% of shares outstanding.

We would underscore: This amount should in no way be viewed as a valuation for Merrill’s 30% stake in the LNG project. Rather, it illustrates BofA’s willingness to settle the legal dispute expeditiously (they’ve got a little more on their plate currently).

Most importantly, the settlement ends the legal overhang for the LNG project, opening up the playing field for negotiations with a range of potential strategic partners looking to obtain a secure long-term source of LNG. !

With drilling at Antelope-1 essentially wrapped up, we are looking toward a number of upcoming catalysts in the coming weeks  most notably, the third-party resource assessment. We are adjusting our estimates to reflect the de minimis dilution from this equity issuance, along with our newly lowered oil price forecast (which reduces refinery revenue but has no impact on profitability).

Our price target of $45.00 is based on a valuation of ~ 80% of our risked net asset value estimate of $55.52 per share shown on page 3. We reiterate our Strong Buy rating.

Upstream Update
InterOil announced a flow test from its Antelope-1 well totalling 382 MMcf of gas and 5,000 barrels of condensate per day – a new record level for PNG. Importantly, as we illustrate in the following table, this flow rate is more than three times greater than prior tests at Elk-1 or Elk-4. The net productive reservoir at Antelope-1 is believed to be in excess of 2,000 feet – a net to gross ratio of 90% – which is over 12 times the thickness intersected in Elk-4.

Also, the flow test was performed with only 30% of the choke capacity open. Antelope-1 and prior wells confirm a combined productive capacity in excess of the amount needed to support a single LNG train (500 MMcf/d). The continued boost in deliverability from the Elk/Antelope structure has only enhanced our thesis that InterOil has discovered several billion dollars worth of hydrocarbons.

Percent Flow Test Results:
Well Gross Net Pay Natural Gas, Condensate
Elk-1 620 88 14% 102 MMcf/d and 5 Bbls/MMcf
Elk-4 600 166 28% 105 MMcf/d and 18 Bbls/MMcf
Antelope-1 2,300 2,068 90% 382 MMcf/d and 13 Bbls/MMcf
Reservoir Section (ft.)
Source: InterOil

At the moment, the reservoir data continues to be analyzed by a duo of third-party engineering firms. We continue to believe there is a high likelihood that this assessment will be released concurrent with the 4Q08 results later this month.

This assessment, in turn, will be an important step toward an asset monetization transaction. The company is furthering its appraisal of the resource potential at Elk/Antelope in order to improve the likelihood that it may receive a sales price comparable to recent transactions in the region, which have valued reserves in the ground on a 3P (possible reserves) basis in the range of $1.60-2.50/Mcfe.

For reference, the benchmark transactions came from ConocoPhillips, which purchased an interest in Australian based Origin Energy; as well as the recent sale by AGL Energy of its 3.6% interest in the ExxonMobil-led PNG LNG project. In other words, we believe that two wells in the Antelope fault block would serve to materially increase the 2P (probable reserves) estimate for the structure and dramatically enhance the overall value of any transaction with a potential strategic partner.

Following a multi-phase sale consisting of a 20-25% interest in the Elk/Antelope reserves and a 10% interest in the LNG project, as indicated by management last year, we believe InterOil would have sufficient capital to fund further exploratory and development drilling operations for the next several years.

Additionally, this transaction has the potential to create an implied “industry” valuation several-fold higher than the market’s current valuation of IOC shares. We should also gain greater clarity into the various monetization options for the high condensate levels encountered in the Elk and Antelope fault blocks, namely the prospects of a liquids stripping facility.

While looking at a 2013/2014 time line of the LNG project, the construction of a liquids stripping plant (with a 12-18 month lead time) would greatly accelerate near-term cash flow for the company. Lastly, we look forward to additional details regarding the company’s roadmap for further delineation and exploration across its acreage.

Finally, while everything seems to take longer in Papua New Guinea, we have become increasingly positive regarding the progress made by the company and value creation in the upstream and liquefaction business segments.

While 4Q08 bucked the positive earnings trend exhibited over the prior two quarters due to the inventory writedown, the cost-reduction steps taken by InterOil over the past few years have transformed the refinery and downstream network into sustainable cash-generating business segments. With plenty of cash on hand, government support on domestic energy projects, and anxious industry partners making sizable investments in LNG infrastructure and upstream ventures, we believe InterOil will be able to successfully unlock the value of its PNG assets through its monetization efforts. As such, we reiterate our Strong Buy rating and $45.00 target price.

Tags: IOC · Research Reports

3 responses so far ↓

  • 1 rory mcgowan // Mar 3, 2009 at 1:08 am

    10 TCF :Merrill out of the way: confident enough to take stock in a company on the AMEX with no reserves : and they lower the price objective into the 40s Thats not a vote of confidence. Wayne had the ng prcied at .75 not these prices $1.60-$2.50 and a target price of $65. What gives?

  • 2 admin // Mar 3, 2009 at 2:27 am

    We’ve just written about this Rory..
    By the way, they didn’t lower their price objective now, but did so a couple of months ago, but there are other issues, see our next post

  • 3 Darcy Patten // Mar 3, 2009 at 6:50 am

    This report appears as though the writer has no intimate knowledge of the asset base and is just cutting and pasting from other articles.

    There is no flow to the article, it jumps all over the place, and there is some questionable logic. Perhaps the person who took over for Wayne is over extended and doesn’t have time to do a complete and thorough analysis.

    Another thing is since the author obviously isn’t the granddaddy of this find they might not be putting 100% effort into the reports. I would guess that the future quality of these reports are going to be disappointing. By product of losing Wayne to IOC it apperas.