One stop shop..
First, fresh from RJ:
InterOil Corp. – Outperform 2
Companies Mentioned – IOC
IOC: Equity Raise a Near-Term Distraction but Supports LNG Partnership Strategy
Analyst(s): Pavel Molchanov
[Industry Classification: Energy/Exploration and Production]
* InterOil announced yesterday that it is raising up to $280 million of capital in a public, fully underwritten transaction. The exact split between convertible debt and equity has yet to be decided, but the bulk is expected to be equity. At yesterday’s closing price, this suggests issuance of roughly 3 million shares, which equates to dilution in the range of 7%. For some perspective, InterOil’s last equity raise in June 2009 was a private placement of just over 2 million shares at a price of $34.98.
* At the outset, we want to underscore that nothing has changed with regard to the condensate-stripping transaction with Mitsui. We make this point because language in the press release announcing the capital raise – specifically, a discussion of the use of proceeds – could theoretically be misconstrued to suggest that InterOil must cover the capital cost of the condensate-stripping plant. That is definitely not the case. Under the terms of the previously signed agreement, Mitsui remains responsible for 100% of the capital cost for the plant (while getting 50% of the economics), with InterOil paying for the pipeline and some other ancillary costs. The project is on track for a final investment decision by March 31, 2011.
* Management’s rationale for doing this capital raise is straightforward. At a time when the company is knee-deep in negotiations with prospective LNG strategic partners, it is vital to project strength rather than weakness – basic Dealmaking 101. With this in mind, the balance sheet takes on particular importance. Recall, as of June 30, InterOil had cash and equivalents of only $51 million, and that number is trending down rather than up, because the company’s exploration program easily outspends the cash flow generation of the refinery and retail businesses. When prospective partners see InterOil’s current liquidity position, some may well conclude – wrongly – that the company is desperate to sign a deal, and of course this would adversely affect the multiple of any resource monetization. Because InterOil’s first-ever monetization inherently sets a marker, a number that will be remembered for years to come, the company does not want to be in a position where potential partners might be inclined to take advantage of it.
* We certainly recognize that some investors will be surprised and disappointed by this capital raise. We expect the shares to pull back today. Dilution is rarely pleasant, but sometimes it’s a necessary evil. We believe this is one of those times. And it’s also worth pointing out that InterOil’s management is putting money where its mouth is – it has committed to buy $44 million (14%) of the total $280 million raise, leaving its ownership stake in the company essentially unchanged. In view of this fact, and the logic for beefing up the balance sheet as part of the LNG partnership strategy, we reiterate our Outperform rating.
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Now, the Monnes Crespi Hart & Co report 1NOV2010, yes, this is before the offering, but interesting nevertheless.