The latest from Raymond James..
IOC: Back in Black in 1Q09; Ongoing Testing Targets Black Gold
- InterOil reported 1Q09 EPS per diluted share of $0.07, beating our estimate of a loss of $0.07. The Refining and Downstream segments drove company wide EBITDA of $10.9 million, a return to the positive trend exhibited throughout much of 2008 and exceeding our estimate of $10.5 million. The company also posted better-than-expected SG&A, exploration, and interest costs. Carrying forward reduced overhead cost assumptions, we are raising our EPS estimates and notably projecting sustained profitability in future quarters (shown below).
- Operational highlights from the upstream business since year-end include: (1) the completion of its first-ever independent reserve report, with the “best guess” net resource estimate of 1.9 Tcf of gas and 33 MMBbls of condensate (2.1 Tcfe); (2) a record flow test at Antelope-1, totaling 382 MMcf of gas and 5,000 barrels of condensate per day; and (3) the recovery of oil (44 API gravity vs. condensate levels closer to 58) from the initial side-track at Antelope-1. Following the recovery of higher condensate yields from its second side-track last week, InterOil plans to continue testing the lower section of the reservoir, which should provide further clarity not only on the oil potential but also define the approach regarding the potential liquids stripping facility.
- Turning to the balance sheet, InterOil exited 1Q09 with cash-on-hand totaling $60.0 million ($17.4 million restricted), while operating cash flow came in at $23.2 million, substantially funding capital spending of $23.6 million. While the company remains focused on asset monetization to provide cash for accelerating the drilling program with multiple rigs, the current liquidity position remains in solid shape. On a related note, a Reuters article published this morning (see page 2) added to the list of the potential voices sitting at the LNG project negotiating table.
- InterOil’s return to profitability this quarter lends further support to our view of the value within its Refinery and Downstream business segments. As testing at Antelope-1 continues amid ongoing LNG discussions, we are looking toward a number of catalysts over the next three to six months. Our price target of $45.00 is based on a valuation of ~80% our risked net asset value estimate of $56.57 per share shown on page 2. We reiterate our Strong Buy rating.
Strategic Partner Discussions Ongoing
- InterOil is continuing discussions with a wide range of prospective industry partners – oil and gas companies and utilities from both the Asia-Pacific region and further afield – about a multi-phased strategic transaction covering the Elk/Antelope field, the LNG project, and LNG offtake agreements. In a Reuters article published this morning from Australia, investors were given a further glimpse into the various international companies that are reportedly in discussions regarding the potential LNG partnership. The article quotes an unnamed banking source, citing the following companies: French integrated supermajor Total (TOT/$56.38); Italian major ENI (E/$47.35), a name that has come up before in regard to investing in PNG; U.S.-based major Marathon Oil (MRO/$30.91); PTT, a state-owned oil company in Thailand; Japanese conglomerate Mitsui; and large Japanese utility Osaka Gas. This list of companies builds upon earlier reports of active discussions with Chinese state-owned oil firm CNOOC (CEO/$124.96), as well as India’s state-owned Petronet LNG.
- To the frequently asked question of how long it will take to get a deal done, our response is: It is far better from InterOil’s perspective for it to take longer in order to get the right transaction with the right valuation multiples, as opposed to speeding up the process and ending up with a sub-optimal deal. In particular, the company is not inclined to do any deal until the completion of the full suite of testing at Antelope-1, since the result could influence valuation. All that said, we think the process (ultimately involving multiple partners) should wrap up by year-end, with initial announcements made as early as this summer.
- The low cost structure of InterOil’s underlying gas assets, along with the ability of partners to gain exposure to the entire LNG value chain, boosts the appeal of the opportunity.
- In terms of valuation, our risked NAV calculation takes into account the following assumptions:
- o 2.32 Tcf of recoverable gas and 36.7 MMBbls of recoverable condensate (the “low end” of the estimated resource range), unrisked
- o 1.11 Tcf of recoverable gas and 22.6 MMBbls of recoverable condensate (the difference between the “low end” and “best guess” cases of the estimated resource range), risked at 50%
- o $1.00/Mcf reserve valuation for gas and $10.00/Bbl reserve valuation for condensate
- o 56% working interest attributable to InterOil
- While it is too early to quantify the financial impact of the higher condensate ratio observed during the company’s latest DST on its second sidetrack at Antelope-1, it is intuitive that the higher ratio bodes well for asset value, particularly within the context of the ongoing strategic partnership discussions. In fact, our risked NAV calculation (based on the midpoint of the reserve range) utilizes a condensate ratio of only 17 Bbls/MMcf. This ratio is below even the low end of the 25-100 Bbls/MMcf encountered by the latest test, implying upside to our current NAV.