Lot of risks disappearing..
IOC: LNG Project Agreement In Hand, Political Risk Is Lifted
- InterOil announced the long-awaited government approval of the project agreement for the construction of its liquefied natural gas (LNG) plant. With the preliminary go-ahead from the National Executive Council (cabinet) in hand, the actual signing of the agreement is expected to come by year end. Recall, InterOil plans to develop a two-train LNG facility (producing ~8 million tons annually), carrying an estimated $7 billion price tag. The current timetable targets an end of 2014/early 2015 start-up, albeit naturally subject to delays that are common with large-scale LNG projects.
- Simply put, this project approval lifts the political overhang from the LNG project and therefore removes a potential hurdle in terms of the eventual signing of LNG partnerships/monetization deals. Our stance has always been that the LNG project would ultimately be approved by the government, because its value to the country (investment, jobs, tax revenue) is indisputable. The risk was merely a function of the limited visibility into the actual timeline for approval due to intra-cabinet disagreements and the associated drag on the signing of any potential strategic partnerships. With approval out of the way, the market’s focus turns back to InterOil’s operational catalysts, along with waiting for a gas monetization transaction.
- With regard to Antelope-2, the next step for InterOil will be the extensive testing of the lower, more condensate-rich zone of the structure, including the potential oil leg. This represents a critical aspect of understanding the value of the reservoir, particularly with regard to the proposed liquids-stripping project. In terms of timing, we believe it is possible for initial testing of this bottom section of the reservoir to be wrapped up by the end of the year, though it seems likely to spill over into 1Q10. As we have stated before, we believe it is in the best interest of InterOil to hold off on pulling the trigger on any strategic partnership until it gets its arms more fully around the size and value of the reservoir (including the condensate levels). On the other hand, while the temptation is always to get “one more datapoint” before signing that all-important first deal, eventually a logical cutoff point will need to be reached.
- InterOil continues to be hitting on all cylinders these days, with this latest positive news on the LNG front coming only a week after the very bullish Antelope-2 drilling report – highlighted by a world-record flow rate and uptick in the condensate ratio. The timing of this is no surprise as we alluded to in our comment on December 1 that “any concerns about the project on the part of prospective LNG partners and any remaining skeptics within the PNG government are likely to be alleviated by these latest results (from Antelope-2)”. Given the obvious magnitude of the resource base at Elk/Antelope, it’s safe to say that the LNG project’s monetization risks have materially diminished vs. our prior expectations as well. That said, we believe it remains essential for investors to recognize that execution risks have not disappeared. These include substantial operational and timing risks as the upstream assets and the LNG plant are developed over the next fiveplus years. We maintain our Market Perform rating.