Analysts: Pavel Molchanov & Alex Morris,
(Exploration and Production)
No Deal Yet, but Exclusive Talks Underway for Resource Selldown With XOM
Exxon and InterOil, in the same sentence. After a year and half of intense market
speculation about which multinational company it would sign a deal with, InterOil has
formally revealed that it is in exclusive negotiations with Exxon about a resource selldown.
This is consistent with management’s previous comments about receiving final bids from
major energy companies. The talks with Exxon are ongoing, so today’s news is not a final
deal announcement, but insofar as this news provides a blue chip “stamp of approval” –
from the world’s largest private-sector oil and gas company, no less – we think it’s a clear
incremental positive. In this context, it’s worth noting the 30% short interest in the stock –
and if you need any reminder on what that implies, take a look at the recent stock price
chart for Tesla.
Here is what we know. InterOil plans to sell Exxon an interest in PRL 15 (the block which
includes the Elk/Antelope field) to supply gas for an additional train at the PNG LNG
project. This LNG facility will initially have capacity of 6.9 million tons per annum (mtpa),
comprised of two trains, and it is currently being built by a consortium led by Exxon and Oil
Search. Payments will be staged, and Exxon will fund additional delineation wells on the
acreage – a deal structure that is customary for these kinds of transactions. InterOil
maintains the option to develop its own LNG project, using the portion of its gas resource
which will be retained at Elk/Antelope as well as other fields such as Triceratops.
Here is what we do not know (yet). Today’s announcement was limited to identifying
Exxon. Here are the four major questions that have yet to be answered.
1. How much of the resource will be monetized?
As a general premise, in these kinds of transactions, the
“big brother” (Exxon in this case) tends to want to purchase more of the resource, and the
smaller partner tends to want to keep more for its own use.
2. What is the timeline for a final deal?
Just as management has (wisely) stayed away from self-imposing any
arbitrary deadlines in recent months, today’s press release did not specify any timetable.
3. Most importantly, what will be the multiple ($ per Mcf) in the resource
selldown?
For context, IOC shares are currently trading at approximately $0.85/Mcf on a
1P basis, which compares to a five-year South Pacific transaction average of around
$1.20/Mcf. (This is not our prediction of how much InterOil will receive for its gas – it’s just
a historical observation.)
4. Will InterOil move forward with development of its own LNG project using its retained gas?
Papua New Guinea’s government would presumably be
supportive of such a project, in order to avoid the creation of a de facto LNG monopoly in
the country, but until the Exxon transaction is finalized, InterOil will not be in a position to
spell out its long-term strategy.
The road ahead. The most important near-term catalyst will be a final deal announcement,
including whatever details of the economic terms will be released publicly. (The
government will, of course, have to approve the final deal.) After that is concluded,
Elk/Antelope appraisal drilling will ramp up (with Exxon covering the costs), after which an
updated resource estimate will be made. Concurrently, InterOil is in the process of hiring
its new CEO, though the company has made clear that a selldown deal is not dependent on
having a permanent CEO in place.