Somewhat curious..

RJ still arrives at a net asset value (NAV) of $55.52 per share by using the following assumptions:

• Recoverable gas: 6.9Tcf
• Recoverable liquids: 69MM barrels
• Gas valued at $0.75/Mcf and risked at 50%
• Liquids valued at $10 per barrel and risked at 50%
• Cash flow discounted at 10%

So, basically, the gas is valued at 37.5 cents. This is curiously low. In the very same report, one can encounter the following quotes:

• This assessment, in turn, will be an important step toward an asset monetization transaction. The company is furthering its appraisal of the resource potential at Elk/Antelope in order to improve the likelihood that it may receive a sales price comparable to recent transactions in the region, which have valued reserves in the ground on a 3P (possible reserves) basis in the range of $1.60-2.50/Mcfe.
• For reference, the benchmark transactions came from ConocoPhillips, which purchased an interest in Australian based Origin Energy; as well as the recent sale by AGL Energy of its 3.6% interest in the ExxonMobil-led PNG LNG project. In other words, we believe that two wells in the Antelope fault block would serve to materially increase the 2P (probable reserves) estimate for the structure and dramatically enhance the overall value of any transaction with a potential strategic partner. [Raymond James 2-3-09]

Now, we understand that prices used in NAV valuation and sales prices are not necessarily the same. However, the gap seems to be too big to explain. We don’t see why InterOil wouldn’t be able to receive similar prices as what Origin got from Conoco, or AGL.

The Elk/Antelope resource seems much cheaper to develop than any Australian coal seam gas, where they have to drill (treat, and man) at least a thousand times more well compared to the wells InterOil needs to drill, and all that in a much higher cost environment.

We’ve argued before that RJ’s valuation method is very conservative. I think we might just have proven that point here..