We posted the wrong report yesterday, here is the right one, and it’s quite bubbling, in more than one respect..
- Following a series of investor meetings this week with InterOil’s management, we came away with a reaffirmed sense of optimism in this rapidly evolving resource growth and monetization story. Below we summarize our key takeaways. We reiterate our Strong Buy rating.
- Antelope-1 drilling on track; still aiming for “bubbling crude”. As had been reported on April 6, the emergence of light sweet crude at the surface of the Antelope-1 well during the ongoing drilling of the sidetrack holds out the tantalizing prospect of a sizable oil discovery, carrying with it a much quicker commercialization roadmap as compared to natural gas (about a year vs. four to five years).
- While the magnitude of the apparent oil leg remains unclear, management underscored that PNG’s previously discovered major gas fields typically have oil legs associated with them. Once the sidetrack process wraps up – possibly involving a second sidetrack at a steeper angle away from the original wellbore – the rig will move to drill Antelope-2, a process that should last well into 3Q09 if not 4Q09. Longer-term, the company’s goal is to acquire one or even two new rigs, enabling multiple wells to be drilled simultaneously.
- Strategic partner talks: Show me the money! InterOil is continuing discussions with a wide range of prospective industry partners – oil and gas companies and utilities from both the Asia-Pacific region and further afield – about a multi-phased strategic transaction covering the Elk/Antelope field, the LNG project and LNG offtake agreements. The most recent company to enter into talks was China’s CNOOC (CEO/$108.12).
- To the frequently asked question of how long it will take to get a deal done, our response is: It is far better from InterOil’s perspective for it to take longer in order to get the right transaction with the right valuation multiples, as opposed to speeding up the process and ending up with a sub-optimal deal. In particular, the company is not inclined to do any deal until the completion of the Antelope-1 sidetrack, since the result could influence valuation.
- All that said, we think the process (ultimately involving multiple partners) should wrap up by year-end, with initial announcements made as early as this summer. The low cost structure of InterOil’s underlying gas assets, along with the ability of partners to gain exposure to the entire LNG value chain, boosts the appeal of the opportunity.
- Refinery and downstream: Back to basics. After a 4Q08 marred by a hefty oil price-related inventory writedown, management’s focus with regard to the refinery and the downstream business is quite simple – returning to profitability. While the global refining margin environment is now unfavorable, the Import Parity Pricing (IPP) formula continues to provide superior margins relative to Singapore crack spreads.
- To improve refinery utilization above the roughly two-thirds level of recent quarters, management is evaluating the logistics of exports to small Pacific islands in the vicinity of PNG.