Increasing it’s NAV. No surprise, they had to do it sooner rather than later.. Still very conservative though.
- Since hitting “pay dirt” at its Antelope-2 appraisal well just over two months ago, the shares of InterOil have been off to the races – climbing roughly 50%. The successful drill stem test (DST) at that time essentially de-risked the potential of the well coming up “dry” and turned investors’ attention toward the question of “just how big is Elk/Antelope.” The subsequent positive momentum in the shares received another shot of adrenaline after the company reported a world-record flow rate at Antelope-2 at the start of December. This latest drilling report also yielded an uptick in the condensate ratio, while more extensive testing of the lower, more condensate-rich zone of the structure (including the potential oil leg) is coming up over the next few weeks/months.
- As we move closer to an updated third-party resource estimate (set to be released in February/March), we are taking the opportunity to forecast the new numbers, particularly in light of the recent upstream data points. While it is unclear precisely how much “credit” the third-party reserve engineers will give for Antelope-2, our “guesstimate” is a year-end 2009 gross resource range of 5.5 – 10 Tcfe, of which the midpoint (7.7 Tcfe) represents a two-fold increase vs. GLJ’s year-end 2008 mid-case estimate, and also sits above the 6.8 Tcfe figure posted by Knowledge Reservoir in June. This figure should be thought of loosely as probable (2P) resources, which we calculate offers risked upside of ~$35/share on top of our current “de facto” proved NAV of $50.32/share (the proved NAV continues to be based strictly on the low end of the year-end 2008 resource range). We would underscore that this “total risked NAV” estimate of $85.61/share is simply the middle of a very wide fairway, with the potential to swing over $15/share in either direction based on our estimated resource range – not counting any incremental impact of the potential oil leg. Furthermore, our resource valuation assumptions of $1/Mcf for gas and $10/Bbl for condensate will in all likelihood be proven wrong (on either side) once the trigger is pulled on a strategic liquefied natural gas (LNG) partnership. We would also point out that while the comparison is not exact for many reasons, of the traditional U.S. E&P stocks for which we calculate a risked NAV, they are currently at an average discount of 20% to the risked NAV estimate (vs. IOC’s discount of 23%), and of course InterOil’s operations carry a higher risk profile.
- InterOil has achieved a number of key milestones, as the move to “prove up” its resource base has been met with an investor base eagerly trying to fit a valuation to the Elk/Antelope structure. As we hope we have made clear, this is much easier said than done. The apparent magnitude of the resource base has materially diminished our view of the monetization risks associated with the LNG project. That said, we believe it remains essential for investors to recognize that execution risks have not disappeared. These include substantial operational and timing risks as the upstream assets and the LNG plant are developed over the next five-plus years. While recognizing the longer-term valuation upside, we maintain our Market Perform rating.