Monness, Crespi, Hart & Co. on Interoil, April 20

A nice report..

InterOil Update

  • InterOil was very busy during the week of April 12-16th.
  • Management spoke at the New York convention of the Independent Petroleum Association of America, an annual affair that normally attracts three or four hundred investment professionals.
  • On April 14th, the company posted on its website a 65 page assessment of its oil and gas resources in Papua New Guinea, a study prepared by GLJ Petroleum Consultants which is a top notch organization of reservoir engineers headquartered in Canada.
  • On April 15th, IOC announced an agreement with Mitsui & Co. to conduct FEED (front-end engineering and design) work on a condensate stripping facility at the ELK/Antelope field in PNG. Management has noted grading and road construction to service the facility is already underway.
  • Each of these developments should be accepted as further enhancement of InterOil’s credibility as a successful exploration company that will soon be a powerful industrial enterprise with a potentially significant annual cash flow. As noted, InterOil and Mitsui will each be responsible for one half of the planned capital investment in the stripping plant (previously reported at $440 million) and Mitsui will fund InterOil’s share.
  • We interpret this arrangement to mean IOC will ultimately own one-half of the stripping operation with little or no direct investment. The proposed development timeline indicates first shipment of condensate in 2012 – 2013 and we presume output will increase in 2014 and 2015 as a second and third train are added on.
  • We assume the final investment decision between IOC and Mitsui will be concluded long before year-end 2010, which will allow InterOil to report its recently reported resource base of 10 trillion cubic feet of natural gas equivalent as proven reserves.
  • Valuation of proved reserves is normally substantially above that attributed to resource estimates. With the condensate project now underway, the deck should be cleared for progress toward a strategic partner in the proposed LNG export project.
  • The normal processing stream would have the natural gas moved from the wellhead to a stripping plant where all the liquids imbedded in the gas are extracted with the dry gas either reinjected into the ground formation or passed on to a facility for conversion into liquefied natural gas (LNG).
  • If possible, it would be desirable to bring on the LNG facility soon after completion of the stripping plant to minimize the cost of gas injection and then retrieval. The current proposed timeline for an LNG export facility centers around a construction start in early 2011 with first LNG shipments in late 2015.
  • The timetable outlined above for both the stripping plant and the LNG facility seems quite realistic and reflects the culmination of several stressful years of negotiation.
  • Release of the full blown GLJ study should dispel any concern about the volume and quality of the gas and liquids found to date in the ELK/Antelope structure. Starting up these two projects with well known credible partners will add a major dose of credibility to InterOil.
  • Management has apparently successfully negotiated a deal to construct a stripping plant in which it will own 50% at no cost and has offered to sell up to 35% of the LNG project. The selling price for the latter project should be a very important indicator of current values.
  • Consummation of these two transactions combined with a growing cash flow from its refining/marketing operations should provide ample financing for an accelerated drilling program on the 35 to 40 nearby geologic prospects already identified.
  • The future earnings potential for the two projects currently being reviewed can usually be defined within a certain range of possibilities. The potential that could develop with any exploration success in the PNG jungle is completely open ended and can not be defined. Our only thought on this point is that in the last two years IOC has put down five wells in the ELK/Antelope structure and four have encountered significant reserves of natural gas and some liquids. We can only dream what might develop with any success on either one or two of the targeted structures.
  • Of course, any oil discovery would be particularly significant in that there is always a ready market for new oil. Investors should look upon the InterOil common shares as a very attractive growth situation with strong finances backed by solid reserve values that will soon be monetized by credible partners along with a world class exploration program. We believe this is a rare combination that investors should be accumulating with a price objective over 100 by year end 2010.