Nataxis Bleichroeder on InterOil November 20, 2009

Competition from Exxon/OilSearch? Not according to Nataxis..

Price: $50.65 EPS $
Target: $53.00 2008A (1.52)
Market Cap (mil): $2,170 2009E 0.55 2010E 0.47

Another Positive for InterOil?
Exxon Expects to Sell Out Its Facility and Announce an EPC Contract by Year-End 2009.

Why Not Follow a Leader with $50 Billion in Cash? We have never been of the view that planned LNG projects by InterOil and Exxon (XOM: $74.65, Not Rated) were in competition. Likely, there will both be enough natural gas in PNG as well as enough demand for LNG in Asia to absorb much, if not all, of the capacity of both of these facilities. Thus, why would InterOil, which has another potential blockbuster well in process, rush to compete with Exxon and give up the opportunity to learn from another’s mistakes and successes? Additionally, removing another source of supply from the market should only benefit InterOil, providing that our thesis on sufficient demand proves correct, which seems to be the case given prior commentary about 17 potentially interested parties. At worst we see these developments as neutral for InterOil and more likely positive for InterOil.

Exxon Reports Robust Interest in Its Papua New Guinea LNG Facility. As reported in yesterday’s edition of LNG Daily, Exxon expects to sell out planned capacity for its PNG LNG facility by the middle of December 2009. Earlier this year Japan’s Tokyo Electric Power and Osaka Gas each contracted to import 192 Mmcfpd from the project. Taiwan’s CPC also is finalizing an agreement for a slightly smaller amount while a subsidiary of China’s Sinopec contracted to take about 256 Mmcfpd. This leaves only about 64 Mmcfpd of uncontracted capacity.

Engineering, Procurement, and Construction Contract Should Be Awarded by mid-December 2009. Again, we think Exxon leading the way is probably a good thing for InterOil as Exxon likely has a team of people dedicated to this project equal to the entirety of InterOil’s workforce, refining included. Exxon leading the way on awarding the EPC contract sets a baseline against which InterOil can negotiate their EPC. As InterOil is, more or less, the monopoly fuel provider in PNG, it also should benefit from increased fuel demand in the interim period as well.

Antelope-2 Interim Drill-Stem Test Results Due December 1, 2009. We expect InterOil to have interim flow-test results for its in-process Antelope-2 well on or about 12/1/09. Initial indication are that the net pay thickness, porosity, and gas-in-place metrics are all equal to, if not greater than, the same metrics for the Antelope-1 well, which is a worldclass well. Confirmation of another world-class well in the Antelope structure should only aid InterOil in its planned asset sell-down, which we expect to be in the $300 million to $500 million range.

Valuation. We base our $53 price target on a long-term discounted cash flow model with an implied probability-weighted success of IOC’s LNG facility of 75%. In our discounted cash flow valuation model we use a 10.3% weighted average cost of capital and a 3% terminal growth rate.

Curtis Trimble, 713-751-1638 713-751-1638

An earlier report dated November 8 provides some background:
Natixis report here 6-Nov-09 11:09 am Highlights from First Call Note

IOC: Options Galore, When Will One Be Exercised?
BUY; Current Price, $46.13; Target Price, $53.00

From Oil to LNG to Condensate, Options for InterOil Abound.Interestingly, according to Yahoo! Finance, open call option interest for InterOil shares for November 2009 through January 2010 expiration number 89,138 contracts. Not that we have a great deal of knowledge on the relationship between open call option interest and shares outstanding or trading volume, but we think this is fairly high option interest for a stock with 44.6 million shares outstanding that trades on average about 683,000 per day. It’s doubtful that such high options coverage is unreflective of the almost binary functions that define InterOil’s exposure to substantial upside potential (and, maybe downside risk) from its ongoing pursuit of high-impact LNG, condensate, and crude oil projects.

Condensate Stripping Facility Estimated to Be Worth Between $10 and $33 Per Share. As currently modeled, with a 50% probability of completion, a 12 bbl per Mmcfe of natural gas production rate, and a positive contribution of about an incremental $0.95/Mmbtu of natural gas produced, we estimate that InterOil’s planned condensate project is worth about $10/IOC share. However, if we step up the condensate production rate to 16 bbls and assign 100% probability of project completion, we estimate the condensate facility is worth $28 per IOC share.

LNG Facility Optionality Gets Silly.Despite a multi-billion capital call on InterOil to construct its planned LNG facility, were the facility to function as we estimate, complete with InterOil supplying all of the required natural gas feedstock, we estimate IOC shares would be worth $146 each. Our current valuation reflects a 75% probability of project success as we have it modeled.

Crude Oil and Refinery “Options” Reflect Minimal Comparative Value for Now.We harbor no expectations for crude oil production in our $53 target price. While we remain quite impressed with the very efficient operations of InterOil’s refinery, we estimate that it is worth about $10 a share.

Strategic Partner, Financing Would “Exercise” an Option.Inking a strategic partner with substantial financial backing for the LNG facility and securing financing for a condensate stripping facility would represent substantial upside potential for our IOC target price. Either of these events would represent a substantial de-risking of a large component of InterOil’s future cash flow.

Results for Q309 Were Quite Good.Entirely reflective of the quality of InterOil’s refining and marketing operations, 3Q09 EPS and CFPS of $0.18 and $0.29 exceeded our expectations for $0.09 and $0.29, respectively. Refined product sales totaled 154.9 million liters versus our estimate of 134.0 million liters. Midstream processing ran at 1,573 Mbo versus our 1,504 Mbo estimate. Improved volumes and the prospective resulting margin improvement lead us to increase our 2010 EPS and CFPS estimates to $0.47 and $1.53, respectively, from $0.19 and $1.19.

Price Target Increases to $53.On the basis of stronger-than-expected refining operations and a stronger balance sheet, we increased our target price $7 per IOC share to $53. We base our $53 price target on a long-term DCF model that assumes a 75% success factor for IOC’s LNG project. We discount these probability weighted cash flows by a 10.3% weighted average cost of capital while assigning the company a 3% terminal growth rate. We maintain our BUY rating.