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Evan Calio – Morgan Stanley
August 13, 2013 7:18 PM GMT
Dr. Hession’s first call at IOC helm went well with clear corporate vision and exploration restart. However, no sell-down news, ~3 months after exclusivity with Exxon weighs on stock.
New leader: what do we know? Today, Dr. Michael Hession led his first earnings call as IOC’s new CEO. What we learned: (1) his presence helps confirm resource credibility (pg 2); (2) refocused vision on exploration (Wahoo prospect in 4Q13); (3) improved clarity of purpose (no LNG operatorship ambition)(our view of IOC vision: discover gas, sell it to a Major and return excess cash to shareholders); and (4) provide less commentary and more action. We believe the last element is cultural and we expect IOC will demonstrate its view in results rather than prognosticate on an outcome in the media. We believe IOC remains committed to an Exxon sell-down, although it has not commented on the process. For Exxon, we believe a 3rd brown-field train at PNGLNG is among the highest return projects in its portfolio, and XOM has a clear need to add high-return, organic investment projects. Exxon, PNG, and IOC appear well aligned in executing an LNG agreement where significant economics can be shared.
A return to exploration: gone fishing. IOC expects to spud Wahoo in late 4Q13 with results in ~2Q14 marking a return to exploration. Wahoo is a multi-TCF prospect that could significantly de-risk on-trend, reefal prospects as Wahoo is large step out from the Elk Antelope and Triceratops discoveries. IOC intends to procure a 3rd rig to drill Wahoo, likely leaving IOC’s other 2 rigs to drill the 4 recertification wells, post finalization of any XOM deal. The restart of exploration implies confidence in the sell-down (exploration spending vs. limited funds).
The waiting game. Until the XOM deal is finalized, the debate on value of IOC’s gas resource continues. A final deal, if and when finalized, will mark a new chapter for the company: a chapter utilizing both value levers (new exploration and monetization of discoveries into cash flow). That new chapter doesn’t begin today yet is becoming clearer under Hession’s stewardship
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