Raymond James interesting day with InterOil…
First, the research report, then some conclusions
InterOil Corp. – Outperform 2;
Companies Mentioned – IOC
IOC: Thoughts from the Road – Integrated Strategy Aligns Condensate, LNG FIDs [IOC012011b_180402]
Analyst(s): Pavel Molchanov & Cory J. Garcia
[Industry Classification: Energy/Exploration and Production]
* We hosted a series of investor meetings with InterOil yesterday, with more today. The main theme of yesterday’s meetings was the company’s integrated approach to the resource development of Elk/Antelope. This is something management has previously discussed, but it was a particularly prominent theme yesterday.
* What does the integrated approach mean in practice? It means that the condensate stripping project (with Mitsui) and the mid-size onshore liquefied natural gas (LNG) project (with Energy World) are being closely aligned. The objective, of course, is to minimize costs. Let’s take a step back and review how this integrated approach came about. Until late last year, the Mitsui project had assumed that gas extracted with the condensate would be reinjected, since the start-up timelines for the condensate plant and the large-scale LNG plant were at least two years off (2013 vs. 2015+). With the signing of the Energy World partnership in September, which brought the targeted start-up of the first LNG train forward to 2013, timelines became aligned, therefore allowing the costly reinjection system to be avoided.
* The alignment of the condensate and LNG projects means that one depends on the other, based on how they are currently being designed. As originally planned, they had been entirely separate, but the alignment decision is clearly beneficial from a cost standpoint. With this in mind, it is logical that the timetables for reaching a final investment decision (FID) on the two projects should also be aligned. Yesterday, management said that FID for both will happen simultaneously, by the end of June.
* This last comment seems to have unnerved some investors, leading to yesterday’s sudden volatility in IOC shares. So let’s be very clear on this point. Yes, the original (pre-Energy World) plan was for the condensate FID to happen by March. Following the Energy World agreement, management’s FID thinking changed. It didn’t change instantly, since CEO Phil Mulacek said on the earnings call in November that the condensate FID remained on track for March. But the change in timing – from March to June – does not equate to a sudden pushout on the part of Mitsui, which seems to be a fear in the market. Rather, it’s a function of the Energy World timeline, which by definition has a much shorter history given that barely four months have elapsed since September. The final documentation for the Energy World partnership is a few weeks away from completion, with FID set to follow by June.
* To recap: If it was only the Mitsui condensate project reaching FID, the March timeline would still hold. The June timeline applies to the two projects together. In the grand scheme of things, this minor tactical shift hardly merits its own research report, but we are well aware that InterOil is a stock that trades on minutiae. Insofar as this timeline has taken some investors by surprise, we’d be buyers on the weakness. We reiterate our Outperform rating.
————–[End of article]————-
A pretty significant conclusion
We heard that one of the recent problems was that Mitsui was insisting on re-injecting the gas. Since IOC is stressing all will be completed in the first half year, and the Mitsui FDI being synchronized with that of EWC this now no longer seems to be the case. This can only have happened because of significant progress by either the EWC project (or a floating LNG project). Which we think it pretty good news.