Morgan’s take on the conference call…
IOC’s conference call portends higher resource and condensate volumes. Drilling Report No. 4, filed this morning, reports that IOC lost and captured the drill string (a challenging down hole operation) leading to potentially a 14 day delay in Antelope-2 drilling, yet we still expect material results:
- on well log (next week);
- and full flow test
- test into the condensate and oil zones over the next 2-5 weeks (all material catalysts into year-end).
The tone on the conference call was clearly positive on early drilling and coring results with upside implications on resource estimates (we assume company’s view is based on 6.7Tcfe estimate by Knowledge Reservoir). In our valuation model, we are assuming 120mmbls of condensate in Elk/Antelope which implies 18bbls per 1mmcfd flowing gas which relates to flows at the top of the structure (higher flow rates are typical into the lower portion of the reservoir).
Further, IOC indicated positive progress on liquids stripping partnership and potential structure: a long-term sale contract of higher quality naphtha and a corresponding loan for financing (100% debt and equity of project vs. 75% debt we assume). A positive condensate well test could accelerate FID and lead to reserve booking by year-end, yet we still assume that FID is 1Q2010 event.
Other Operational Highlights
3Q results: positive operating results yet working capital volatility. Operating results exceeded our estimates with $14.6MM of EBITDA in the quarter, $10MM in recurring EBITDA with both operating segments, Refining (midstream) and Downstream (distribution). Reported total
throughput was 19,657bpd at 50% utilization (upside skew as development activity picks up in PNG).
Net cash flow was negative ($35.6MM), leaving IOC’s unrestricted cash position at $60.7MM post 3Q09 vs. $96MM post 2Q09. $6.5MM relates to an increase in restricted cash relating to OPIC loan, the remaining delta is primarily in change in working capital (decrease of liability) associated with timing in crude payment. Working capital has been historically volatile (as with most downstream companies) and, in our view smooths out over time.
Potential catalysts remain:
- Antelope-2 full well test results and DST in the liquid-rich gas zone in mid and late November,
- horizontal drilling for oil potential in Antelope-2 in mid-December,
- GLJ/Knowledge Resource update due in later January 2010,
- Liquid stripping venture early 2010 and
- LNG Partnership/upstream sell down which is expected in 1H 2010
Outlook: We maintain our positive risk reward outlook and believe IOC represents a compelling investment opportunity as highlighted in our recently published note “Management road show and Antelope-2 well data support improved risk/reward profile.” We believe IOC’s transformation from a speculative exploration company to a global LNG and upstream explorer