November 12, 2013
InterOil Corporation
Sell-Down Mention as Exploration Returns
Positive sell-down mention. The focus of yesterday’s release and today’s conference call will likely be CEO Michael Hession’s statement, “negotiations with a number of supermajors regarding monetization of our gas resources are in the final stages... We expect to be able to make an announcement on the selection of our development partner before year-end.” This is the first time new CEO Hession has provided guidance on deal timing and has been relatively conservative in Street communications. While IOC has missed other guided deal dates, we believe Hession provides new credibility and expect more context for his belief on the call. Industry sentiment around Elk/Antelope appears to be improving, particularly given XOM’s mention on its last two earnings calls about potential PNGLNG expansion.
Exploration returns (maps pg 2).
While the potential sell-down controls near-term valuation, exploration adds potential for longer-term value. Yesterday, IOC announced a six well drilling program starting before YE13, which includes one well in each of PPL236, 237, and 238; two wells in PRL15; and one well in APRL39. Three different rigs will be drilling exploration wells: (1) in PPL236, Wahoo-1 will be drilled utilizing IOC Rig#3; (2) in PPL238, new prospect Bob Cat-1 will be drilled utilizing IOC Rig#2; and (3) in PPL237, IOC has “contracted an additional rig” to drill Raptor-1.
Results secondary: liquidity intact.
At its current stage, IOC is a net asset value driven company where earnings data remain less relevant. EPS for 3Q13 was ($0.13) vs. MS $0.04 and Street $0.02 and CFPS was ($0.01) vs. MS $0.13 and Street $0.24. Variance from our estimates was driven by weaker Asian refining margins. Cash, equivalents, and cash restricted was down $18MM QoQ to $79MM ($39MM restricted) on 9/30/13. A $250MM secured capex facility (led by Credit Suisse) was announced and provides a funding bridge to the potential sell-down. IOC also acquired a 4.25% IPI interest for 100k shares, which will increase IOC’s interests by the same in the remaining IPI wells.