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Raymond James upping InterOil

May 23rd, 2011 · 2 Comments

From hold to outperform..


With a price target of $80. What’s going on?

  • Pavel replaced Wayne at RJ and they worked together for years, so it’s probably a good idea to keep track of Pavel’s calls.
  • He is satisfied that there won’t be further new projects to delay of the FID’s of the present projects with Mitsui, EWC, Flex/Samsung
  • Not mentioned, but Shell going ahead with a (bigger) FLNG has given this new approach further credence.
  • Not mentioned either, but the gas market is tightening (see earlier BBC article posted here)
  • For IOC is in talks to achieve two preliminary (HoA) off-take deals, testifying to the improving conditions on the LNG markets
  • Let’s not forget that RJ uses P1 figures to arrive at NAV ($110). P1 figures (6.47Tcf and 105.3mmbbls) are a lot smaller then the P2 figures (8.59Tcf and 128.9mmbbls)

The RJ report:

InterOil Corp. – Outperform 2 – Target price = $80.00;

InterOil Corp. IOC:NYSE – Upgrade from Market Perform 3 to Outperform 2. Target Price goes from NM to $80.00.

Upgrading IOC to MO2 at 54% of NAV, Despite Back-End-Loaded Catalysts

Recommendation: On April 12, we downgraded InterOil from Outperform to Market Perform, noting that the pushout of the final investment decision (FID) until late 2011 diminished near-term catalysts and frustrated many investors. With the shares now trading at just over half of NAV, we believe that they have been marked down to a level that again presents a worthwhile entry point, and therefore, we are upgrading them to Outperform. With speculative stocks like IOC, one needs to be opportunistic, and we are also heartened by what has finally become an unambiguous message from management: no new project deals until FID is already in place. As a tactical matter, we think the stock will directionally trade up toward FID. As always, we are balancing (1) InterOil’s long-term cash generation potential and upcoming newsflow with (2) operational, cost, and timing risks as the upstream assets, condensate plant, and LNG plants are developed over the next three-plus years.

* Reviewing the roadmap to cash flow. Since the original Elk/Antelope discovery in 2006, InterOil has been proceeding along two parallel tracks: (1) a drilling program aimed at assessing the extent of the resource and (2) a monetization program aimed at creating an export outlet for the stranded gas and condensate. For now, drilling is on hiatus, and in any case, the market has long been focused on monetization. InterOil has brought in three partners: Mitsui for condensate stripping and Energy World and FLEX for LNG. The decision to align the three components of the resource development has the benefit of reducing capital costs but also means that FID must occur simultaneously for everything. Thus, FID for the Mitsui/Energy World/FLEX projects was pushed back last month for the second time, from June 30 to year-end. We believe this deadline will be met. All three components are expected to have a 30-month construction timeline, which equates to first production in mid-2014. Of course, we have underscored many times that large-scale energy projects, including LNG plants, typically come in over budget and behind schedule.

* What will happen prior to FID? The short answer is, probably not much, but with InterOil, we have learned to never say never. Once the next well spuds (a 4Q event), exploration surprises (positive or negative) are always a possibility. Also, it’s possible that InterOil will soon sign LNG offtake agreements, ideally with a resource monetization component – the long-awaited selldown. We think this will most likely be finalized post-FID, though a preliminary “heads of agreement” – still a tangible catalyst – is realistic beforehand.

Valuation: IOC is currently trading at 54% of our “de facto” proved NAV estimate of ~$110 per share. While recognizing that valuation is not very meaningful until FID and/or a resource selldown, the 54% figure can be loosely compared to medians of 148% (large-cap) and 139% (small/mid-cap) for traditional, production-stage E&P companies. Our $80.00 target price is based on a ~25% discount to NAV, which comprises a sum of the parts valuation of each of the business segments, as detailed on the following page.

Tags: IOC · Research Reports

2 responses so far ↓

  • 1 N // May 23, 2011 at 10:19 pm

    We have all seen outperform prices several times over the past couple of years with IOC and surely expecting to hit triple digits in stock price. How is this projected price any different from the past. My personal opnion. I think this stock will ping pong back and forth as it keeps going lower and lower from the 70s to the 60s for a while, then in the 50s which it is now, and once we hit 49 it will ping pong in the 40s and bottom there. its a downward spiral until IOC goes into commercial production or establishes a FIRM deal with surrounding countries to purchase LNG. IOC was so much fun to be apart of in 2008 when it would go up 10%+ on exciting news. Now it has lost its pop and NO news will get IOC going execpt a deal that will start generating dollars for the company and its shareholders……still a great stock to have for 2013+ for now its just down right depressing

    my 2 cents

    feel free to add to my comment

  • 2 Roger // May 23, 2011 at 11:40 pm

    N,

    I respectfully disagree. We see much more supportive management now who are accurately describing where IOC is and where they are not. They are the only true sources of information we should listen to, the yahoo board is an absolute mess.
    From the latest call we now know that they are just starting to work on the preliminary offtake agreements, its still going to be months if not end of year until HOA are signed. We know that drilling rig #2 will not be active until mid to late next year. We also know that they plan on spudding and hitting target by the end of this year at Bwata. Management believes they can hit target b/c Bwata is shallower than Antelope.

    I believe that things are finally going to come together and management will meet end of year FIDs. Its three years longer than expected but I will be happy when it happens.