RJ says

[jft310]

Companies Mentioned - IOC, XOM

IOC: 2Q13: Talks with XOM Continue; New CEO Lays Out Strategic Vision 

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 Exxon about a sizable resource selldown. We reiterate our Outperform rating. 



* 2Q13 recap. InterOil has never used its earnings releases to announce major operational updates, and today was no different. The 2Q13 EPS of $(0.27) compared to our estimate of $(0.12). With refining/downstream revenue and gross margin ahead of our expectations, the delta on the bottom line came entirely from a foreign exchange loss. Needless to say, though, the market's focus is elsewhere. 



* Selldown: You weren't expecting a play-by-play update, were you? At the risk of repeating what we have written before many times, let's be clear: management did not, will not, and should not specify any precise timetable for making a deal announcement. The new CEO, Michael Hession, is sticking with the approach, which we think is entirely correct, of not self-imposing arbitrary deadlines, nor publicly discussing the "inside baseball" of how the talks are proceeding. The key questions that remain vis-à-vis the Exxon (XOM/$89.89/Outperform) transaction are the same as we have previously had: (1) the amount of resource to be monetized; (2) the multiple ($ per Mcf) underpinning the resource selldown; and (3) whether InterOil will thereafter move forward with a stand-alone liquefied natural gas (LNG) project.

Hession lays out his strategy. While (predictably) not giving any meaningful detail on the Exxon talks - other than confirming the exclusivity of the talks - Hession made several comments about what he envisions with regard to long-term strategy. First, he clarified what has already been entirely apparent: InterOil does not plan to be the operator of any major resource development projects, but remains open to future partnerships, including vis-à-vis a future LNG project (after, of course, the Exxon transaction is finalized). Such a project is a viable possibility, but emphatically not a near-term priority. Second, as the company gets ready to resume exploration after an extended hiatus, the aim is to bring in more drilling partners, thereby reducing cost exposure and operational risk. The drilling program on the PPL 236 block includes the multi-Tcf Wahoo prospect, long mentioned by the company. Third, Hession mentioned his desire to streamline corporate structure, with resource monetization at the center of the business model. 



Valuation. Our "de facto" proved NAV estimate of $101.32 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 $0.79/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 NA

[Tree]

Thanks JFT for your informative, as usual, post.

..."You weren't expecting a play-by-play update, were you?"...

[Tusker]

Thanks JFT for your informative, as usual, post. ..."You weren't expecting a play-by-play update, were you?"...

Well, here is one play.  The resumption of exploration means that IOC & XOM have concluded a drilling program for E/A.

[Tree]

Thanks JFT for your informative, as usual, post. ..."You weren't expecting a play-by-play update, were you?"...

Well, here is one play.  The resumption of exploration means that IOC & XOM have concluded a drilling program for E/A.

Link?

[Tusker]

Thanks JFT for your informative, as usual, post. ..."You weren't expecting a play-by-play update, were you?"...

Well, here is one play.  The resumption of exploration means that IOC & XOM have concluded a drilling program for E/A.

Link?

Comman sense, less the 10%.

[ArtM72]

Thanks JFT for your informative, as usual, post. ..."You weren't expecting a play-by-play update, were you?"...

Well, here is one play.  The resumption of exploration means that IOC & XOM have concluded a drilling program for E/A.

Tusker -

I don't remember hearing anything specific about drilling programs other than Wahoo 1 which will use a newly (to be?) contracted rig.  I went back to the transcript looking for what I missed but the transcript is so bad I can't believe anything that is written there.  Holland saying Raptor east of Antelope?  I don't think so.  "Elkanteraptor" does though have an interesting ring to it.

[Palm]

Interesting mention in the MDA on rigs. States:

"Rig-2 was demobilized from the Antelope-3 well location back to Herd Base for consolidation of camp
locations, further sand blasting and repainting of rig components."

Off to Wahoo with Exxon's blessings?

[ArtM72]

"Off to Wahoo with Exxon's blessings?"

One thing I clearly heard Holland say was they were going to contract for the rig to drill Wahoo 1. He also mentioned a primary reason for drilling Wahoo 1 this year is to meet license obligations. That was interesting as it was my recollection PPL 236 drilling obligations had been waived to facilitate rapid development of PRL 15.

It is all as clear as drilling fluid.

[Petro2458]

Very good call from Hession. I believe we are selling an OPERATED stake in E/A and this frees up our rigs to drill other prospects. XOM will continue E/A development as the Operator in my opinion.

[CesiumFormate]

Very good call from Hession. I believe we are selling an OPERATED stake in E/A and this frees up our rigs to drill other prospects. XOM will continue E/A development as the Operator in my opinion.

Is it possible that they are doing something similar with Total on 237/Triceratops since Total is paying for all the new seismic?  I think it is interesting the Pacific Rubialis has not yet brought in the two rigs that had ben mentioned earlier.

CF

PS - If the drilling fluid was cesium formate it would be clear!