Outperform
New team – new dream
Transferring coverage with Outperform & U$80/sh target
Our new U$80/sh IOC price target is set at a ~3% discount to our sum-of-parts valuation of U$82.51/sh, offering 20% upside to the current share price.
o Assuming a 7.1tcfe Elk/Antelope resource, we estimate the share price reflects a ~65% risking for a 2 train, 7mtpa LNG development. Beyond this, further upside rests on likely project de-risking and drilling success.
o Indeed, with up to 8 important wells to be drilled over the next 15 months and a planned FID at (what we refer to as) Antelope LNG to follow mid-2016, this valuation could drift significantly higher over coming months.
Antelope LNG well placed in a more competitive world
We assume an Elk/Antelope resource of 7.1tcfe (in line with independent GCA estimates) and note that lingering uncertainties surrounding the field’s size will have been largely addressed by year-end with the planned appraisal program.
o As with PNG LNG, Antelope LNG looks set to benefit from attractive fiscal terms, low onshore development costs and respectable liquids yields. This drives an attractive estimated IRR of ~24% and a breakeven price of just U$7.9/mmBtu at Antelope LNG – both extremely competitive for a greenfield project. That said, in light of the current turmoil in PNG, these attractive returns are set against an uneasy political backdrop.
o While much has been made of recent disharmony between the JV partners, we do not believe the threat of arbitration will be required or that the planned Elk/Antelope appraisal program will slip. In part to achieve this end, we assume TOTAL takes over as upstream and downstream operator of the integrated Antelope LNG project at FID.
A large foothold in an increasingly prospective basin
With a growing prospect inventory in the increasingly prospective Eastern Papuan Basin, an impressive track record in the region to date and with the balance sheet constraints now dealt with, IOC has embarked on its most significant exploration program. This has started with three rigs currently drilling and with up to 8 wells expected over the next 18 months testing over 700mboe of prospective resource which could drive material NAV upside.
On firmer financial footing
With U$400m of upfront proceeds from the PRL15 sell-down, an enlarged U$300m bridging facility, the likelihood of a considerable future resource payment from TOTAL and a ~U$125m (gross) back-in payment from the government, IOC looks comfortably funded through to FID on Antelope LNG (especially given its significant carry in the current drilling program). After this, we expect the LNG development to be project financed suggesting IOC may have largely managed its funding pressures.
Simply a better story
Ultimately, the new look IOC offers a more experienced management team, more credible joint venture partners, a stronger balance sheet, a clearer route to market for Elk/Antelope gas and the company’s most material drilling progr
to date. Coupled with an attractive valuation, IOC has rarely offered mor
