You wouldn’t know it, but Hollywood actor Shia LaBeouf once picked a potentially winning stock: New York-listed InterOil. He just happened to be five years too early.
To prepare for his role in the 2010 movie “Wall Street: Money Never Sleeps,” Mr. LaBeouf learned a thing or two about finance, andpitched InterOil as a momentum play to an interviewer. In those days of triple-digit oil, this energy exploration stock traded rich, thanks to excitement about a natural-gas find in Papua New Guinea.
However, critics soon declared the company overhyped, raised worries that the management was unreliable and that the Papua asset’s geology untrustworthy. The stock is down some 40% since Mr. LaBeouf’s tip.
At a lower price, however, the company has more going for it. It boasts a new management led by a former executive at Australian major Woodside, plus a board helmed by BG Group’s former chief.
And its key Papua gas field, called Elk Antelope, has attracted notable partners: French giant Total, which operates the field, and Oil Search, another Australian firm. This is also what suddenly makes the company a play on the most important trend in a sub-$50 oil world—consolidation.
Energy majors no longer want to invest in risky exploration, instead preferring to grow by buying into already started projects. Liquefied natural gas projects in Papua make for sensible investments. They’re some of the cheapest in the LNG world, meaning they could survive the current glut. And with proximity to Asia, they can service the center of LNG demand over the long term.
In September, Woodside bid for Oil Search, two of whose most promising assets are stakes in Elk Antelope and a second Papua LNG project. Last month, Australian firm Santos, part of whose appeal is a stake in that second project, said a private fund wanted to buy it out. Both Oil Search and Santos refused. This leaves InterOil as the only independent firm which has a Papua gas asset and whom no one is publicly courting.
The big question is how a suitor would assess Elk Antelope’s undeveloped resources. Auditors will only officially certify the gas finds around mid-2016, though two early audits point to sizable reserves.
InterOil has an enterprise value of $3.93 for every eventual barrel of oil equivalent of proven and probable reserves, assuming much of the Elk Antelope find is confirmed, according to estimates by Sanford C. Bernstein’s Neil Beveridge. This calculation also assumes that the Papua New Guinea government exercises its right to acquire a stake in Elk Antelope. This is attractive compared with the $9.70 that Woodside bid for Oil Search, using the same variables, and somewhat in line with the $3.62 that Santos was offered.
But InterOil’s valuation could look even more favorable after Total hands InterOil a wad of cash, something it will do if enough of the gas is certified. Assuming a moderately successful outcome, then InterOil’s enterprise value, which adjusts for net cash, falls below $2 a barrel. Additional cash from the Papua government would help further.
Investors should be prepared for InterOil to play a new role: takeover target.