- Following InterOil’s LNG settlement agreement with Merrill Lynch (BAC/$6.27/Strong Buy) earlier this month, yesterday the company announced the hiring of financial advisors for its proposed multi-phased transaction with one or more strategic partners – the sale of interests in the Elk/Antelope field and the LNG project, along with associated off-take agreements.
- In this brief, we offer some thoughts on the most obvious question on investors’ minds: “How much money we talking about here?“
- First, let’s look at an “intrinsic value” NAV approach. Our risked NAV/share, in addition to projecting refinery and downstream cash flow, assumes the midpoint of the previously estimated 2.5 to 11.3 Tcf resource range for gas at Elk/Antelope, or 6.9 Tcf. (Importantly, the drilling results from the Elk-4 and Antelope-1 wells suggest that this range has ample room to increase.)
- We adjust for the company’s roughly 60% working interest and apply a 50% risking factor (because these are not yet proved reserves).
- We then apply a $0.75/Mcf multiple, which we view as conservative not only relative to gas’s intrinsic value in Asia’s premium-priced (typically $10+/Mcf) LNG market, but even North America’s depressed gas market (where proved reserves are now valued typically at $1.50 to $2.00/Mcf).
- We also assume a 1:100 liquids ratio, or 69 MMBbls, at $10/Bbl and risked the same way. Our risked NAV/share comes out to $55.52, or 247% of the current share price. We would underscore that this NAV does not include any credit for resource potential at any other prospects.
- Second, let’s look at a “transaction comps” approach. Given the geography, there is a limited set of deals to look at, and the most comparable one in our view is the recent $800 million purchase by Nippon Oil of AGL Energy’s (AGL/$26.53) PNG exploration interests and 3.6% stake in the LNG project led by ExxonMobil (XOM/$69.09). These assets are broadly analogous to what InterOil is marketing.
- The deal was announced last October and closed in December. If we treat the exploration interests and the LNG project as one “package” for purposes of the transaction – which is how we think InterOil will proceed – then the implied value of the entire package is $22 billion. Not a bad chunk of change, but let us be crystal-clear: We are not actually predicting that InterOil’s asset sale will have an equivalent valuation, i.e. proceeds of $5+ billion for the sale of a 25% stake.
- Obviously, no two projects or asset packages are identical. But what the Nippon-AGL deal tangibly illustrates is that there is interest in PNG by large international energy companies, despite the tough economic conditions.
- Our sense is that the bulk of the proceeds from InterOil’s asset sale would be attributable to gas in the ground as opposed to the “entry premium” paid by the buyer for joining the LNG partnership, but regardless of how the deal is ultimately structured, the main strategic goal for InterOil is to bring in a solid partner who can provide balance sheet support throughout the LNG plant’s development.
- As the process progresses, the market should gradually “de-risk” its perception of the InterOil story, resulting in a meaningfully higher valuation. We reiterate out Strong Buy rating.
We think that at least some of the 50% risk factor should disappear with the advent of third party reserve reports…