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+--- Thread: Westlake (/showthread.php?tid=3727)
Westlake - Gator - 05-25-2013
InterOil Corporation (NYSE:IOC) May 24, 2013
Exclusive Negotiations with ExxonMobil, Major Validation of InterOil and its Resources
Maintain BUY and Raise Price Target to $130 as Risk of Not Reaching Deal is Removed.
Waiting for Deal Economics to Be Announced to Further Review Price Target
RE: Westlake - Gator - 05-25-2013
• InterOil Corporation (IOC or “the Company”) announced that it has entered exclusive negotiations with ExxonMobil (NYSE:XOM) on development of the Elk/Antelope resource.
• Exxon will fund additional delineation wells in the Elk/Antelope fields, which will be followed by recertification of resource.
• IOC and its long time partner Pacific LNG will have the option to either independently develop a second LNG project in the Gulf Province that may also use gas from PRL 15 and potentially other discoveries (i.e. Triceratops, Wahoo/Mako, Tuna) or pursue further development with ExxonMobil.
• Deal has limited economic details as the parties are still in the negotiations.
• Transaction discussed with PNG Government and will be subject to its final approval.
RE: Westlake - Gator - 05-25-2013
• Major validation of InterOil and the Elk/Antelope resource.
o InterOil would not announce that it is in exclusive negotiations with a particular company unless it felt like it was very close to completing a deal.
o Exxon does not let its name get thrown around in press releases without some degree of approval.
o Exxon would not risk its reputation by doing a deal with InterOil if it thought the resource was not legitimate.
o Exxon will pay for (carry) InterOil’s share of the delineation wells at Elk/Antelope Fields.
• Overall economics of building additional trains at the existing PNG LNG facility is very attractive.
o Additional liquefaction capacity can cost as little as $400/ton of LNG produced when common facilities are shared versus the total PNG LNG Project cost around $2,750/ton, including upstream cost.
o The gross resource of ~9.5 Tcfe at Elk/Antelope is enough to underpin up to 2 LNG trains. We expect that Exxon is securing enough gas to support 1 train (~4 Tcfe), when one includes the 22.5% government share.
• Fastest path to cash.
o Adding another production train to an existing plant is typically a 2 year type project versus 4+ years for a green field project.
o Could allow new LNG to hit the market by 2016, which fills a critical gap and will allow Exxon to secure favorable long term contracts by meeting customer’s near-term needs before new green field projects come online.
o Refer to Figure 13 of our Initiation Report for a map showing how close the IOC project proposed port is to the under construction PNG LNG pipeline.
• The multiple bidder situation likely allowed InterOil to keep a fair share of the economics of the gas.
o IOC clearly had multiple bidders seriously interested in the resource.
o Thus, we believe they had reasonable alternatives to selling the gas to Exxon, and would only take a bid if economics were favorable.
• Achieving deal with very credible partner is strong endorsement of Company management team.
• Investors now will start to include value for other prospects outside of Elk/Antelope fields.
o IOC has a number of other prospects that look quite attractive such as Triceratops, Wahoo/Mako, and Tuna. These prospects have been largely ignored by investors as the primary focus is on commercializing the Elk/Antelope fields.
• Changing Price Target slightly with the risk of not achieving a deal coming off of the table. Will review price target further when deal economics are announced.
o We had estimated a 10% chance that IOC was unable to commercialize the project built into our price target. With this announcement, we are removing that risk and raising our price target to $130/share.
o We expect further upside revision to price target when favorable deal specifics are announced.
o While our current model is based on a 1 to 2 train green field LNG plant, we believe the economics of that model served as a floor for what Exxon had to pay to secure this resource.
• Still some unanswered questions regarding the size and timing of the milestone payments.
o We expect the majority of Exxon’s payments to come from the carried capital expense and backend resource payments. While a bearish investor could argue these should be heavily discounted, we think the path to commercialization and relatively fast cash flow through LNG sales argues for only a slight discount.
• We believe the deal will be easily approved by the PNG government.
o Allows people to keep working on the construction of an additional train at the PNG LNG project.
o Keeps option open for eventual Gulf LNG project.
RE: Westlake - Brew Swillis - 05-25-2013
Partial sell-down, cash infusion, retention of licenses, looks like early Christmas. Ho ho ho!
Brew