Raymond James Equity Research
InterOil Corp. - Outperform 2 - Target price = $100.00;
Companies Mentioned - IOC, PRE
IOC: Having Slowed Ahead of Election, LNG Process Resumes with New Cabinet [IOC081412c_091901]
Analyst(s): Pavel Molchanov
[Industry Classification: Energy/Exploration and Production]
Recommendation. Our positive stance on InterOil is predicated on its long-term cash flow potential and the expectation of near-term catalysts. This is balanced by the operational, cost, timing, and political/regulatory risks as the upstream assets and processing infrastructure (condensate and LNG) are developed. We see multiple near-term catalysts, including an LNG partnership (incorporating a resource sell-down) with a major international oil and gas company, followed by the final investment decision (FID), though we again caution investors from having overly rigid expectations as to timing. We reiterate our Outperform rating.
* Operationally quiet 2Q12; exploration picking up. 2Q12 EPS of $(0.66) was below our $(0.11) estimate due to lower product pricing, higher premiums paid on crude purchases and a large price-related inventory writedown. In keeping with InterOil's past precedent, there wasn't much real news in conjunction with the 2Q results. On the drilling front, the latest drill stem tests at Triceratops-2 are consistent with earlier positive results. Work on the well wrapped up yesterday. Rig #2 is readying to head to the next prospect, Antelope-3, while Rig #3 is readying for deployment to Elk-3. The next Triceratops well is set to begin upon completion of Antelope-3, though InterOil will discuss adding an additional rig with its drilling partner Pacific Rubiales (PRE/C$24.09/Strong Buy - covered by RJ Ltd.)
* Government and partner discussions resume after election. Management acknowledged that the process of selecting a strategic partner ground to a halt ahead of July's election, as both InterOil and prospective partners awaited the new cabinet's formation. With the cabinet being finalized in the past week, InterOil has a green light to resume discussions in earnest. Management had a constructive "kick-off meeting" today with Energy Minister William Duma and will be meeting tomorrow with newly reelected Prime Minister Peter O'Neill. The sequencing of whether government approval is necessary before a strategic partner can be selected - or vice-versa - remains unclear, though management did note that bids from prospective partners have improved with the election's conclusion. On the downside, the timing of LNG production startup is (not too surprisingly) being pushed out, shifting out by one year to late 2015/early 2016. Bottom line: As discussed in our comment published July 16, "IOC: Raising Target to $100; Election Clears Path to Finalizing New Partnership," we think an LNG deal announcement is likely in 3Q, though, as always, InterOil's business development does not lend itself to precise timing.
Valuation. Our "de facto" proved NAV estimate of $99.89 per share comprises a sum-of-the-parts valuation of each of the business segments. Our target price is $100, in line with the NAV. To restate an important point we have often made in the past: the resource value embedded within the NAV ($1.00/Mcf for the Elk/Antelope field's gas resource) is a largely hypothetical "guesstimate" that reflects the absence thus far of tangible market multiples for Elk/Antelope. Once the partnership and associated resource sell-down are announced, we will be able to "mark to market" our NAV accordingly.