Joined: Apr 2013
InterOil: Risks dissipating, reward greater than ever, timing soon
For those who still think there’s political risk to deal closure, consider that Peter O’Neill’s PNC Party controls more than 1/3rd of Parilament, and with its coalition partners, more that 3/4ths of the 111 seats. Consider that O’Neill expressed his strong support for InterOil’s impending XOM partnership in Parliament last month and that the news was reportedly greeted with a standing ovation. Also, consider that “the transaction has been discussed with the Government of PNG in general terms”, implying that O’Neill has already been apprised of the deal structure.
For those who think that InterOil’s SPA is complex or somehow not a very positive outcome, consider the brilliance of this transaction. The deal encompasses XOM taking virtually all the risk (the purchase of 4.6 Tcf is not contingent on recertification, there will be substantial staged payments to IOC prior to production, XOM’s discussions with PNG LNG partners will commence only after a binding SPA with IOC is consummated), it provides InterOil with sufficient cash to “cover [its] share of infrastructure costs and fund exploration” (including a multiple rig drilling program, a pipeline to the Gulf coast, a gathering system, and a CSP), and it provides for an XOM funded appraisal program that could increase the size of the resource in Elk/Antelope to in excess of 12 Tcf with delineation across the east-west section of the structure to prove out the seismic interpretation (hence retroactively reducing IOC’s dilution to PRL 15). Most importantly, it establishes a floor valuation (I believe at least 2X the current market cap) that will immediately be enhanced by the stepped up NAV associated with monetizing the Gulf Province option, which I believe is worth in excess of $3 per mcf under even the most negative scenario. InterOil’s retention of the Gulf option provides an immediate path to a subsequent sell-down or partnership with a major operator at a much higher valuation than the initial XOM SPA. Hence the catalytic path will make the SPA announcement a “buy on news” development.
For those who think that “negotiations” subject the deal to risk of falling through or that timing is far off, consider that the “negotiations…came as the result of a commercial binding process” and that “major commercial terms had already been agreed before entering exclusive negotiations”. More importantly, consider that XOM and IOC likely guided O’Neill to completion of the SPA before the end of July given that he publicly disclosed this expectation to Parliament. There may not be a 60 day stringent exclusivity period, but nonetheless this is a timeline that the companies are incentivized to adhere to and will almost certainly meet. Also, with Oil Search’s reported acknowledgment in recent road show meetings of at least 4 final bidders for a stake in PRL 15, InterOil must have attained complete certainty in a positive outcome with XOM in order to have definitively rejected the other bids.
For those who think that InterOil will not be ascribed at least full credit for the NAV of its first two trains (a figure that implies more than a 3X increase in the stock), consider Cheniere Energy (NYSE: LNG), which was granted FERC authorization to site, construct and operate its proposed 16 mtpa Sabine Pass liquefaction facility in two phases on 4/16/12. Unlike InterOil, Cheniere is not the low cost producer given that it doesn’t own the upstream, pays ~$4 per mcf for Henry Hub and $3 of shipping costs to Asia. Unlike InterOil, Cheniere doesn’t have a resource to sell down to fund its infrastructure costs and hence company has issued ~$370 million of equity year to date and its guidance contemplates an additional $200 million of equity issuance this year. Just like InterOil, Cheniere’s initial capacity is expected to come online in late 2015 or 2016.
Cheniere’s stock has appreciated 120% in the past year. Barclays derives an NAV for trains 1-4 of $22 assuming a discount rate of 11%. Assuming full utilization of all the company’s marketing capacity, Barclays calculates an incremental $20 per share of appreciation potential, and the investment bank derives a DCF of $32 comprised of the contracts for trains 1-4, some marketing, and some credit for a 5th train. Hence the stock market has not only ascribed credit for the Cheniere’s first 4 trains, but also it has incorporated in the valuation additional growth opportunities that face significant uncertainty. CSFB only estimates that Cheniere will generate CF per share of $1.46 in 2016 and $2.79 by 2020; hence the stock trades at 10X estimated 2020 cash flow, a valuation that if ascribed to my projections for InterOil would result in the stock's being by far the best performer on the NYSE.
Just as FERC approval and offtake agreements catalyzed a rapid derisking and revaluation for Cheniere, closure of InterOil’s SPA with XOM will be a game changer for InterOil. InterOil is in a much better relative position to Cheniere given its upstream interests and vertically integrated operation, its lower cost structure, its flexibility to sell down resources to avert issuing equity, and its plethora of growth prospects and accretive capital deployment opportunities.
Combining InterOil’s significantly undervalued assets in what has emerged as an exceedingly benign jurisdiction with the impending XOM SPA, the subsequent Gulf LNG deal, and the seemingly imminent insertion of a new experienced and competent CEO could result in more than a 3X move in the stock yet this year. So why is the stock down 35 points since the announcement of the XOM announcement? If there were ever a time to take a shot on InterOil’s stock, it’s now. The takeover scenario by RDS.A and TOT is also more likely now that ever with both companies having almost certainly conducted complete due diligence on the assets.
Shell and a top global downstream operator recently visited IOC's refinery. They were recognized by multiple IOC employees. I've also heard that Shell has continued its communications with Duma despite Petromin being dismembered and XOM getting exclusivity on PRL 15. All of this leads to a high probability of a bid from Shell for all of IOC, as bidding for just PRL 15 is no longer on the table. Lots of positive scenarios in the next few weeks. Have a good weekend.
Sentiment: Strong Buy
All the manipulation is close to an end - they hired known felon Barry Minkow to try to discredit IOC - he is back in jail - where his hedgescum partners hopefully end up - they can hide all the trading in dark pools - less than 20% of the volume is actually on the NYSE - largest bid-ask spreads of any NYSE stock - they can lie, float bull, do illegal bear raids, have their media puppets post FUD on blogs and websites, send loser Adam failed poker player to lie over and over again - but they can't stop the largest company in the world from salivating over one of the best energy discoveries in the world not owned by big oil...soon all the manipulation and lies end and the facts drive this first to $140 then much much higher....thanks Resourcearb.