InterOil Corp. – Outperform 2 – Target price = $80.00;
Companies Mentioned – IOC,PNG
IOC`s 2Q10: Refining Drives EPS Upside; Still Awaiting LNG Deal by Year-End [IOC081710c_112301]
Analyst(s): Pavel Molchanov
[Industry Classification: Energy/Exploration and Production]
- InterOil reported 2Q10 earnings of $0.17 per share, above our $0.10 estimate and a clear turnaround from 1Q’s loss of $0.07. Companywide EBITDA for the quarter came to $14.9 million, above our $12.2 million estimate. The global refining rebound drove strong Tapis (Singapore) crack spreads, which combined with lower crude price volatility and improved naphtha premiums to generate refining segment EBITDA of $17.0 million, vs. our $14.4 million estimate. Meanwhile, the retail segment notched in-line EBITDA of $7.1 million.
- While earnings were solid, it goes without saying that InterOil is not (yet) an “earnings story.” Consistent with InterOil’s past practice, the quarterly conference call didn’t provide much in the way of incremental newsflow on either the drilling front (Antelope-2) or the strategic development front (LNG and condensate projects). The company’s second rig is in Papua New Guinea and being made “jungle ready,” and upon completion by year-end will head to the Elk/Antelope site to be the primary development rig for the planned condensate stripping plant. Meanwhile, the original rig will move to a new exploration prospect, most likely Bwata after the recent seismic survey there.
- The ongoing work at Antelope-2 hasn’t been cheap, with InterOil spending ~$20 million in 2Q alone on the prospect, bringing its first half total to $40 million (out of total upstream cap ex of $61 million). With available cash of $32 million (plus restricted cash of $19 million), balancing the pace of development with the balance sheet was one of the focal points of the call. To that point, the company noted that it has $87 million available on its working capital facility, plus its recent $25 million short-term loan with Clarion Finanz. Given its debt/cap of only 10%, the company should have no problem maintaining financial flexibility until the conclusion of its LNG partnership talks, still expected by year-end.
- As detailed in our August 4 brief, “IOC: Condensate JV Advances, Values LNG Project at $22B; Raising Target,” the condensate joint venture with Mitsui is progressing nicely. The key element of the JV agreement is Mitsui’s option to convert its investment (estimated at $550 million) into a 2.5% interest in the LNG project, valuing the project at $22 billion, or $2.42/Mcfe. Of course, this implied valuation is somewhat theoretical at present, because it is only an option that has not yet been exercised.
- Our Outperform rating reflects our positive stance on InterOil’s long-term cash flow potential and likelihood of near-term catalysts, including our view that one or more LNG partnerships will be announced by year-end. This is balanced by the substantial operational, cost, and timing risks as the upstream assets, condensate project, and LNG plant are developed over the next five or more years. Our $80.00 price target is based on a ~30% discount to our “de facto” proved NAV estimate of ~$109 per share, which comprises a sum of the parts valuation of each of the business segments.