• We assign a $115/share target price on IOC’s stock (see page 17). We believe IOC is substantially undervalued relative to the expected cash flows of its assets (see page 16) and undervalued relative to the universe of LNG transactions (see page 19).
• The Company has a very large natural gas (9 Tcf) and condensate (135 MMbbls) discovery in PNG that has been verified by outside experts in its resource report. This large commercial discovery is well suited to underpin a proposed Liquefied Natural Gas (LNG) export project, which could cost effectively serve the fast growing Asian economies.
• IOC’s gas fields should prove to be world class discoveries. The Company reports hydrocarbon column heights of 1,700-2,300 feet and net pay of 1,465 to 2,088 feet for its three Antelope wells. For context, the Hides Gas Field which is set to supply an Exxon led LNG project in PNG has 100-200 feet of pay (see page 29). We take additional confidence in IOC’s assets, since Pacific Rubiales (TSX:PRE, Market Cap: $8.0 Bn) executed a ~$345MM deal for a 10% share in one of IOC’s fields (see page 14).
• We believe the Company is close to finalizing its bidder selection to sell part of its natural gas discovery to finance the LNG project. The Board of Directors is in the process of evaluating the different bid proposals. In the coming weeks, we expect IOC to select a winning bidder, execute some type of accretive agreement with the bidder and seek PNG approval of the chosen bidder group.
• We expect the Company’s stock to appreciate significantly over the coming months and years as the Company gets closer to realizing the substantial cash flows that will be provided by an LNG plant. In the short term, we expect volatility related to bidder selection and deal terms.
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Sentiment: Strong Buy