Raymond James Equity Research
InterOil Corp. - Outperform 2;
Companies Mentioned - IOC
IOC: Regardless of Project Structure, Gas Resource Value Offers Ample Upside
Analyst(s): Pavel Molchanov & Cory J. Garcia
[Industry Classification: Energy/Exploration and Production]
* When it comes to the brewing three-way controversy involving InterOil, PNG's energy minister, and (apparently) Shell, not all facts are known, but we take this opportunity to offer our thoughts. The bottom line from the standpoint of investors ought to be this: regardless of the precise structure of InterOil's resource development, the intrinsic value of the underlying gas resource is materially higher than what the shares are currently pricing in. At current levels (in the mid-$40s), the stock is discounting less than $0.50/Mcf of 1P resource. In our "de facto" proved NAV, we apply a multiple of $1.00/Mcf, and we have often pointed out that actual gas resource transactions in Asia-Pacific in recent years have been done at considerably higher multiples (typically $2.00/Mcf and up). Thus, irrespective of how the gas ends up being monetized, it should be worth substantially more than what the stock is currently implying.
* Here's what we know. PNG's Sunday Chronicle reported that supermajor Shell (RDS.A) has been attempting to undermine InterOil's position in PNG as part of a strategy to force its way into InterOil's resource development. The newspaper reported that a written offer was made by Shell to representatives of Petromin (PNG's state oil company) in this regard. This apparently took place in April. Of course we cannot confirm whether the newspaper's account is correct, but history teaches us not be naïve. In November 2010, the U.S. Justice Department fined Shell $48 million over its contractor's involvement in bribing Nigerian customs officials. In the hyper-competitive world of international oil and gas resource access, underhanded tactics are hardly unheard of.
* Here's what else we know. PNG's new energy minister, William Duma, has expressed concerns about InterOil's partnerships, namely the fact that InterOil has not brought in a major integrated oil company to operate the LNG development. We have seen this movie before: see, for example, our company brief from July 26, "IOC: Thoughts on Floating LNG Project After Minister's Skeptical Comments." In the grand scheme of things, it is irrelevant whether Duma is being influenced by Shell or whether he truly believes that the project will be best served with an operator other than InterOil. While there seem to be some tensions between Duma and the new prime minister, Peter O'Neill, regarding the appropriate tone to be used with foreign investors, the political nuances here are also not what shareholders need to focus on. The simple reality is that even if the PNG government "forces" InterOil to bring in a major oil company (Shell or otherwise) into the project, that does not change the fact that InterOil controls a valuable gas resource, and that resource is not going to shift to Shell or anyone else unless InterOil accepts the fiscal terms. PNG is not Cuba or Venezuela, so insofar as investors have concerns about nationalization or expropriation, these concerns should be set aside.