Some interesting comparatives with other deals..
Raymond James comparing InterOil to a couple of deals on PNG, those of Rift Oil and OilSearch. First, Rift Oil.
- Looking strictly at the raw numbers, Rift is selling itself at a cheap multiple – not surprising, as it is a distressed seller (see details below). So, to be crystal-clear on this point, we absolutely do not see the Rift deal as a suitable “apples-to-apples” transaction comp for InterOil. Given Rift management’s “mid-case” (P50) internal resource estimate for Rift’s natural gas discoveries, which was 500 Bcf net (769 Bcf with a 65% interest) as of November 2008, the implied acquisition value of the resource is $0.38/Mcf. For InterOil, the analogous P50 net figure – but, importantly, based on third-party analysis – was 2,108 Bcfe (including a liquids component) at year-end 2008. Applying Rift’s $0.38/Mcf multiple would yield a resource value of $793 million, which is $17.27 per fully diluted InterOil share. Using the updated P50 net figure of 3,730 Bcfe, disclosed last Friday concurrent with InterOil’s shareholder meeting, and applying the same multiple would yield $30.56 per share. This, of course, does not include any value for InterOil’s non-E&P assets (refinery, downstream and working capital), which we estimate at $13.17 per share net of liabilities. Putting the E&P and non-E&P assets together would thus yield a total value of $30.44 to $43.73 per share.
- In our InterOil brief published earlier today, “IOC: Thoughts on the Talisman / Rift Oil Transaction”, we laid our four specific reasons why investors should not be using last week’s announced acquisition of Rift Oil plc by Talisman Energy (TLM/$14.62) as a valid transaction comp for InterOil. Above and beyond those four reasons, we feel it is important to point out a fifth one, as well.
- Following discussions with the RJ Ltd. analyst who covers Talisman, we would underscore the fact that Talisman’s acquisition of Rift represents an “aggregation play” of what is a textbook definition of stranded gas. Rift’s estimated 769 Bcf (gross) of P50 gas resource as of November 2008 – which, to be clear, is a Rift internal estimate without third-party confirmation and thus not at all comparable to InterOil’s independently audited figures – is far below the “critical mass” required to support an LNG project in PNG. We believe that it takes a minimum of 3 Tcf of P50 gas resource to support a stand-alone LNG project in PNG. Even if Rift were not a distressed seller running out of cash, it is highly questionable whether it could extract full economic value for its limited quantities of gas. Accordingly, the cheap multiples at which Rift was willing to sell itself inherently reflect the depressed value of stranded gas.
- While Rift’s resource represents stranded gas on its own, it carries more value when combined with additional gas resource – namely, Talisman’s own gas in PNG. Talisman has an offshore gas discovery in the Gulf of Papua, called Pandora. In December 2008, Talisman reported that it is considering building a floating LNG plant in order to commercialize Pandora. While Pandora’s estimated gas resource of 1.5 Tcf is probably too small to support its own LNG plant, it gets closer to “critical mass” when combined with Rift’s resource.
- And since we’re on the subject, we take this opportunity to remind investors about another recent transaction in PNG – one that we see as fundamentally much closer to InterOil’s pending asset monetization than the Rift deal. We are referring to the $800 million purchase by Nippon Oil of AGL Energy’s PNG exploration interests and 3.6% stake in the LNG project led by ExxonMobil (XOM/$71.05/Outperform), which we described in our March 18 brief, “IOC: How Much Could the LNG/Elk Monetization Be Worth?” 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 InterOil aims to proceed – then the implied value of the entire package is $22 billion. Not a bad chunk of change, though we reaffirm what we wrote on March 18: 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 when the seller is a company with (1) a healthy balance sheet, (2) enough gas to support its own LNG project, and (3) third-party engineered resource estimates – all of which describe InterOil, but not Rift – the multiples tend to be dramatically different from what Rift sold itself for.
- With our risked NAV estimate of $53.82 per share approximately twice InterOil’s current share price, we reiterate our Strong Buy rating.