07-16-2012, 08:13 PM
IOC: Raising Target to $100; Election Clears Path to Finalizing New Partnership
Analyst(s): Pavel Molchanov
Recommendation. Our positive stance on InterOil is predicated on its long-term cash flow potential and the expectation of near-term catalysts. This is balanced by the operational, cost, timing, and political/regulatory risks as the upstream assets and processing infrastructure (condensate and LNG) are developed. We see multiple near-term catalysts, including a liquefied natural gas (LNG) partnership (incorporating a resource sell-down) with a major international oil and gas company, followed by the final investment decision (FID), though we would again caution investors from having overly rigid expectations as to timing. We reiterate our Outperform rating.
* Election wraps up. PNG's general election substantially wrapped up last week after three weeks of voting. Results from some of the constituencies are already clear; for example, it is known that the incumbent Prime Minister Peter O'Neill has been handily reelected. There will be a period of coalition-building (most likely a few weeks) before the shape of the next cabinet becomes clear. As far as who exactly will be in the cabinet, those are political subtleties that are immaterial for the InterOil story; as we show in the table on page 2, no less than seven different prime ministers, from various parties, have led PNG during the time that InterOil has actively worked in the country. The most important thing, in our view, is that this election ends a lengthy period of political dysfunction that has lasted since last fall's constitutional crisis involving the conflicting claims of O'Neill and Sir Michael Somare to the prime minister's post. Now that this is over, the government will be able to shift its focus to substantive policy matters, such as energy.
* Path is clear to the long-awaited partnership announcement. With political hurdles out of the way, the path is clear for InterOil to finalize planning for its resource development project, and in particular, to receive approval for closing a deal with its new strategic partner(s). Management has delayed announcing the partnership until after the new government is formed, so at this point we would expect an announcement in the near future. We think a 3Q announcement is likely, though, as always, InterOil's business development is not a process that lends itself to precise timing. Our company brief from June 20, "What Investors Should Focus on in a 'Major' LNG Partnership," laid out the key questions investors should focus on when evaluating the announcement.
Valuation. Our "de facto" proved NAV estimate of $102.02 per share comprises a sum-of-the parts valuation of each of the business segments, as detailed on page 2. With political risk substantially reduced following the recent election, we are raising our target price to $100, in line with the NAV. To restate an important point we have often made in the past: the resource value embedded within the NAV ($1.00/Mcf for the Elk/Antelope field's gas resource) is a largely hypothetical "guesstimate" that reflects the absence thus far of tangible market multiples for Elk/Antelope. Once the partnership and associated resource sell-down are announced, we will be able to "mark to market" our NAV accordingly
Analyst(s): Pavel Molchanov
Recommendation. Our positive stance on InterOil is predicated on its long-term cash flow potential and the expectation of near-term catalysts. This is balanced by the operational, cost, timing, and political/regulatory risks as the upstream assets and processing infrastructure (condensate and LNG) are developed. We see multiple near-term catalysts, including a liquefied natural gas (LNG) partnership (incorporating a resource sell-down) with a major international oil and gas company, followed by the final investment decision (FID), though we would again caution investors from having overly rigid expectations as to timing. We reiterate our Outperform rating.
* Election wraps up. PNG's general election substantially wrapped up last week after three weeks of voting. Results from some of the constituencies are already clear; for example, it is known that the incumbent Prime Minister Peter O'Neill has been handily reelected. There will be a period of coalition-building (most likely a few weeks) before the shape of the next cabinet becomes clear. As far as who exactly will be in the cabinet, those are political subtleties that are immaterial for the InterOil story; as we show in the table on page 2, no less than seven different prime ministers, from various parties, have led PNG during the time that InterOil has actively worked in the country. The most important thing, in our view, is that this election ends a lengthy period of political dysfunction that has lasted since last fall's constitutional crisis involving the conflicting claims of O'Neill and Sir Michael Somare to the prime minister's post. Now that this is over, the government will be able to shift its focus to substantive policy matters, such as energy.
* Path is clear to the long-awaited partnership announcement. With political hurdles out of the way, the path is clear for InterOil to finalize planning for its resource development project, and in particular, to receive approval for closing a deal with its new strategic partner(s). Management has delayed announcing the partnership until after the new government is formed, so at this point we would expect an announcement in the near future. We think a 3Q announcement is likely, though, as always, InterOil's business development is not a process that lends itself to precise timing. Our company brief from June 20, "What Investors Should Focus on in a 'Major' LNG Partnership," laid out the key questions investors should focus on when evaluating the announcement.
Valuation. Our "de facto" proved NAV estimate of $102.02 per share comprises a sum-of-the parts valuation of each of the business segments, as detailed on page 2. With political risk substantially reduced following the recent election, we are raising our target price to $100, in line with the NAV. To restate an important point we have often made in the past: the resource value embedded within the NAV ($1.00/Mcf for the Elk/Antelope field's gas resource) is a largely hypothetical "guesstimate" that reflects the absence thus far of tangible market multiples for Elk/Antelope. Once the partnership and associated resource sell-down are announced, we will be able to "mark to market" our NAV accordingly
