We had some discussions with Raymond James analyst, here is our take

1) RJ’s change in NAV calculation is in line with how they value other E&P companies. That is, it’s on the basis of proved (P1) resource base, as certified by the company’s SEC filings. Previously, 50% of the gas of the middle case (P2) resource estimation was included in their NAV calculations.

That means that they acknowledge the P1, low-end value of the GLJ report only, which basically limits them to the low-end estimate of the Elk wells, since the official resource estimation report by GLJ hardly includes any data from the very successful Antelope1 well.

Invoking the SEC for using these stringent valuation guidelines is somewhat curious in the light of the fact that the SEC itself is moving in the opposite direction. The markets and the Society of Petroleum Engineers. We have written before about resource classification, here an extensive overview.

2) With respect to the timing of this new NAV calculation, they acknowledged that they could have done that earlier.

3) They argue the move was instigated by the discrepancy of how they treat other E&P companies and ‘short-term execution risks’ not being properly discounted by the market. By the latter, they mean monetization efforts. The one thing that can be responsible for this is the opposition of certain PNG cabinet members to a formal project agreement, at this time.

Raymond James agrees that the project will ultimately be agreed upon by the PNG government, but cite low visibility as to the timing as a risk. Apparently they think it could delay deals with third-parties. That could be, but this is by no means necessary:

• Everybody knows it’s a delay. Not even those ministers expressing opposition argued that the agreement between PNG and IOC on the table (the 13th draft) is no good and should be argued. The reason for the delay is that some fear a project agreement now might be detrimental to the other LNG project (the Exxon/OilSearch project), although this cannot be a risk for their offtake terms (that project has already as good as sold out), but perhaps their efforts of getting the $12+ billion LNG facility financed might suffer from competition.
• Worst case, project agreement will have to wait until the Exxon/OilSearch project has secured their financing. They’re already well underway of doing that.
• It could be that good Antelope2 results put pressure on the government (the Prime Minister and Energy Minister already publicly back IOC’s project) and/or enlisting some help from prospective third partis (like Petronet of India, which expressed an interest in buying all InterOil’s LNG).

Conclusion

• In the light of their previous practices and change at the SEC itself, their NAV calculation seems unduly conservative. It excludes rather a lot, as we argued in the previous post.
• We know with certainty that this NAV will have to increase when Antelope1 data will be officially included in a new offical independent resource estimate, and if Antelope2 hits as well (which, after discovering the top of the formation, seems very likely), even that will be included.
• So we have a very conservative valuation effort, excluding things that we know are there already, that nevertheless puts the NAV $10 above today’s closing price.

Things could be worse..