Per Pavel today after CC:
"Uneventful 1Q13; Despite YTD Gain, Shares Still Trading at Only $0.70/Mcf
Recommendation. Our positive stance on InterOil is predicated on its long-term cash flow
potential and the expectation of impactful catalysts. This is balanced by the operational, cost,
timing, and political/regulatory risks as the upstream assets and processing infrastructure (LNG
and condensate) are developed. We see multiple near-term catalysts, including an LNG
partnership (incorporating a resource selldown) with an international company, followed by the
final investment decision, although as usual we would caution against having rigid timing
expectations. We reiterate our Outperform rating.
♦ 1Q13 recap. InterOil has never used its earnings releases to announce major operational
updates, and today was no different. Solid refining and downstream results led to 1Q13
revenue of $350 million and EPS of $0.08 – ahead of our $285 million and $(0.21)
estimates – but, of course, the market’s focus is elsewhere.
♦ Selldown: No “play by play” update, and that is wise. Two and a half months have passed
since the final bids from prospective partners were received on February 28, and we
understand that investors are tired of waiting for an LNG deal announcement. At the risk
of repeating what we have written before many times, let’s be crystal-clear: Management
did not, will not, and should not specify any precise timetable for making a deal
announcement. The interim CEO is sticking with the approach, which we think is entirely
correct, of not self-imposing arbitrary deadlines. He did, however, say that a deal
announcement will likely come before a permanent CEO is hired.
♦ Doing done right doing it quickly. A common question we have heard: With the bids in
place, why can’t the decision be made almost instantly? This being the most impactful
decision in InterOil’s history, it is far more important to get it done right than to get it done
quickly. But that aside, we think the winning bid has been chosen already. However, that
does not mean that the agreement can be finalized instantly. Keep in mind, InterOil and
the partner will be making a commitment with many specific provisions – it’s not just a
generic partnership. This includes LNG plant size, technology, contractors, LNG pricing
policy, offtake agreements, etc. As such, there are post-bid discussions that must be
wrapped up before a comprehensive agreement can be signed and then announced.
Finally, there is oversight from the government - which prolongs any discussion - though
management confirmed (again) that all of the final bidders meet the government's criteria.
Valuation. Our “de facto” proved NAV estimate of $100.54 per share comprises a sum-of-theparts
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 $0.72/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. On a side note: Epic short squeezes recently in such
stocks as Tesla and SunPower show what can happen with a heavily shorted stock (in the case
of InterOil, over 35% of float) when a company comes out with a positive announcement."
Thanks Pavel
