Selldown to TOT Is Announced; Despite Question Marks, Deal Makes Sense
Recommendation.
The resource selldown to Total represents a key milestone in InterOil’s history,
and as investors know full well, it’s been a long time coming. This concludes the monetization
process with a credible partner - one of the five western supermajors. While Total hasn’t been
widely rumored as a partner for InterOil - in contrast to Exxon and Shell - from every objective
angle, it is an equally solid company. Thus, if nothing else, today’s news should put to rest any
lingering perceptions in the market that InterOil cannot be a trustworthy counterparty for a large
multinational energy company. Assessing the deal in its totality, we think it makes sense. This is
not to obscure the fact that the structure of the deal carries some uncertainty, but under the
circumstances, the transparency is as high as could be hoped. While we recognize that the market
wants greater clarity on deal economics - which is simply a matter of time - our NAV is
substantially unchanged (as shown below), and thus we reiterate our Outperform rating and we
remain buyers in today’s sentiment-driven weakness (down ~ 39% currently).
Here is what we like about the deal. First - to restate this point - it is readily apparent that
Total is a strong partner. Also, the upfront (1Q14) payment of $613 million is substantial
figure - around 20% of InterOil’s current market cap - and, to be crystal-clear, it is larger than
we had expected. As management clarified on today’s call, the upfront payment and all
future payments will be regarded as capital gains, and because Papua New Guinea has no
capital gains tax, these payments will be tax-free to InterOil. Also confirmed on the call is the
fact that the government has extended InterOil’s acreage licenses - a concern that we had
heard from investors in recent months.
♦On the flip side, there are some elements of uncertainty/ambiguity that will not be fully
resolved until 2015.
As is typical in these kinds of transactions - that is to say, large preproduction
resource quantities, especially in frontier markets - the total transaction value will
not be known until 2015 at the earliest. Over the next 12-18 months, there will be an
appraisal drilling and certification process - fully funded by Total. In essence, Total wants to
develop its own resource estimates - above and beyond the existing estimates provided by
InterOil’s reserve engineering firm, GLJ Petroleum Consultants - and the total deal value will
only be determined once the certification is complete.?
How does this change our NAV? Not much at all. As detailed on pages 58 and 59 of the Sale
and Purchase Agreement filed today with the SEC, the valuation multiples (above and beyond
the fixed payments) will vary with how much resource is certified. The “brackets”, adjusted
for the government back-in, are: $0.77/Mcfe for 3.5 to 5.4 Tcfe; $1.03/Mcfe for 5.4 to 6.5
Tcfe; and $1.29/Mcfe above 6.5 Tcfe. Based on GLJ’s 2P (mid-case) resource estimates at
year-end 2012, we estimate the aggregate resource value net to InterOil at $4.9 billion, which
is a bit higher than our prior “guesstimate” of $4.7 billion. (At this point, we are not ascribing
any value to the economics of the prospective LNG plant.)
Valuation.
Our updated NAV estimate of $102.87 per share comprises a sum of the parts
valuation, as detailed on page 2, and our target price of $100 (unchanged) is in line with the NAV.
The resource value embedded within our NAV reflects the key metrics of the Total selldown, with
the important caveat that it will not be firm until the resource is certified.