Raymond James Equity Research
InterOil Corp. - Outperform 2 - Target price = $100.00;
Companies Mentioned - IOC, XOM
IOC: 3Q13 Release Brings Confident Pledge of Selldown Decision by Year-end [IOC111213c_071711]
Analyst(s): Pavel Molchanov
[Industry Classification: Energy/Exploration and Production]
Recommendation. Our positive stance on InterOil is predicated on its long-term cash flow potential and the expectation of impactful catalysts, balanced by the operational, cost, timing, and political/regulatory risks. The key upcoming catalyst the market is waiting for is the completion of the ongoing negotiations with multiple parties about a sizable resource selldown, which management is pledging by year-end. We reiterate our Outperform rating.
* 3Q13 recap. The loss of $0.13 per share beat our estimate of $(0.18). Revenue came in a bit short of our expectations, with the bottom-line upside driven by lower corporate expenses. Needless to say, though, the market's focus is elsewhere.
* Selldown decision: finally, a timetable. When new CEO Michael Hession was hired in July, he took a more cautious approach to managing expectations than his predecessor. In that context, it is notable that InterOil now feels comfortable specifying a "self-imposed" deadline for the long-awaited resource selldown, something that management has shied away from over the past year. The promised timetable is to make the announcement by year-end 2013 - six weeks and counting. In addition to a concrete timeframe, Hession expects a "transparent" valuation in the selldown, which we take to mean that a $/Mcf multiple will be publicly disclosed. The press release stated that "negotiations with a number of supermajors" are in the "final stages" - language that has been used by the company previously, but again, the year-end target is new. Exxon confirmed on its 3Q call last month that talks with InterOil were ongoing (even though exclusivity lapsed in August). Exxon clearly remains interested in supplying the third train of its PNG LNG project, and InterOil's language indicates that at least one more interested party is also in the picture. The key questions for the selldown announcement include (1) the amount of resource to be monetized; (2) the $/Mcf multiple, and (3) how much cash will be received up front.
* Exploration on deck. After a slow year for exploration amid the management transition and focus on the selldown, 2014 should bring accelerated activity. The first step was securing funding - as a stopgap measure in advance of the selldown - taken care of via a syndicated $250 million loan facility led by Credit Suisse. Three prospects are on deck across three separate acreage blocks: Wahoo-1 (PPL 236), Bob Cat-1 (PPL 238), and Raptor-1 (PPL 237). In the meantime, the company is negotiating acreage license extensions with the government, though for now, management isn't giving much color on the details.
Valuation. Our "de facto" proved NAV estimate of $99.74 per share comprises a sum-of the parts valuation, as detailed on page 2, and our target price of $100 is in line with the NAV. Put another way, shares are currently trading at $0.80/Mcf on a 1P basis. The resource value embedded within our NAV ($1.00/Mcf) is a "guesstimate" that compares to a five-year South Pacific transaction average of around $1.20/Mcf. Once the resource selldown is announced, we will be able to "mark to market" our NAV.