I have encountered many investment opportunities with significant dislocations over the course of my career, but there were only a handful in which the catalytic path towards a revaluation has been so clear and imminent. It is rare to discover a stock with a steep upward sloping price trajectory that could be considered a distressed asset, but InterOil's (NYSE: IOC) exploration success in the past several years has far surpassed the appreciation in its market value.
As an example, following an exceptional year with the drill bit during which Interoil's certified resource estimate grew to 9.1 Tcfe gross (5.2 Tcfe net), the enterprise value (EV) at the end of the year was $3.3 billion. Despite an improved LNG market, finding another significant structure, and identifying several additional prospective targets, the company's EV is roughly the same two and a half years later. InterOil's current net 5.6 Tcf of exceedingly low cost natural gas and condensate resources in the Eastern Papuan Basin trades at a depressed valuation of ~$0.60/mcfe excluding any value for its exploration acreage, downstream assets, and its recent Triceratops discovery, a reefal structure with twice the aerial extent of Antelope.
InterOil is in the midst of concluding a multi-billion dollar sell down of Elk/Antelope to internationally recognized LNG partners, and the imminent culmination of this process is likely to catalyze a revaluation of the company in excess of $200 per share. The NAV of InterOil's resources significantly exceeds the arbitrary value being ascribed by the market, and the upcoming sequence of catalysts will make this dislocation very clear. Australia is the marginal producer at costs in excess of $6 - $11/mcf. Conventional gas resources such as those possessed by InterOil in PNG have substantially lower F&D costs and much more prolific production rates than coal bed methane resources and hence have much higher NAVs. [Read on here]