Raymond James on InterOil


IOC: Agreement for Midsize LNG Plant In Hand and Ample Room for 2nd
Project [IOC092810b_133201]
Analyst(s): Pavel Molchanov
[Industry Classification: Energy/Exploration and Production]

  • InterOil has announced the signing of a binding agreement with EnergyWorld Corp. to build an onshore LNG facility – InterOil’s first LNG deal ever. The plant will be a 2 million ton per year facility (with potential to expand to 3 million), processing ~1.5 Tcf of gas over a 15-year period. At just ~18% of Elk/Antelope’s estimated gas resource (as of year-end 2009), this isn’t the “strategic” LNG project that we’ve been expecting by year-end but, rather, an offtake agreement for a modest portion of InterOil’s resource base. 
  • Hong Kong-based Energy World is an Australian-traded integrated energy company with core operations in Indonesia and Australia and an emerging LNG business. Early-stage cap ex is expected to total $910 million. A key point is that the cap ex will be fully funded by Energy World, and in return, it will be entitled to a 14.5% “royalty” on the proceeds from LNG sales. A definitive agreement is set to be finalized this year, with plant startup targeted for late 2013 – coinciding with the startup of the condensate stripping JV with Mitsui.
  • All-in, InterOil has clearly delivered on its pledge to sign an LNG deal in 2010. That said, this agreement does not include asset monetization, e.g., a selldown of the gas resource for upfront cash. Thus, this is not the strategic partnership that we (and the market) had been looking for but, rather, an offtake agreement (with InterOil capturing the vast majority of the resource value) similar to the proposed floating LNG facility. InterOil remains in talks with the six different consortiums studying that option, though the Energy World agreement makes the floating route less necessary.
  • Finally, with this deal, the timing of the larger LNG partnership is now somewhat muddled. We had been expecting an announcement for a 5- to 7-million ton (two-train) facility by year-end, consistent with management comments. While we would not be at all surprised by such an agreement this year, a push-out into 2011 is possible. Note, however, that management reiterated that strategic partnership negotiations remain on track for an announcement in the near future.