Morgan Stanley put out an update following their week spent on the East Coast with CEO Dr. Hession. Here is the road ahead as MS sees it:
Bigger picture upside. Valuing IOC to a similar sized interest in PNGLNG (XOM's project) would equate to
~$10Bn post start-up based upon various asset comparables vs. IOC's current $1.5Bn enterprise value. There is
potential for IOC to achieve that valuation in 2021/2022, at startup of their similarly sized project which would
imply over 460% upside (assuming $3Bn of project debt attributable to IOC). There are clear execution risks yet
therein lies the upside price in IOC's equity. Funding of IOC’s equity interest in the facility (25% of $4Bn,
although we see downside to this figure given the current deflationary cycle) can be fully achieved via Total’s
resource and FID payments. Additional upside can be achieved by converting other resource and prospects into
projects, and completing a similar monetization cycle to the Total agreement in which they are currently
progressing in.
What’s next and when? Ant 4 results are expected in mid-October. Resource upside will be driven by the
extent of dolomitization to GWC (+.5Tcfe). The sidetrack hitting the reservoir higher provides some modest
uplift. Ant 6 should spud, drill, complete and test in 4Q15-1Q16. The key for Ant 6 will be whether the rock
quality is lower, as assumed, or dolomitized,like the periphery of the reef. We expect 2 appraisals of Elk/Antelope
as it relates to PAC LNG payments (1Q16). Additionally, we expect one appraisal by TOT and another one by IOC
with results of both by mid-year 2016. We also expect downside to 2016 capex guidance into year-end as IOC
shifts to non-op and see potential for exploration/appraisal deals over the several quarters to fund forward
appraisal/exploration activity.
LNG pessimism. We expect near-term pressure in the spot LNG market as new supply start-ups likely exceed
demand during the 2016-2017 period. However, we also believe in the long-term demand and believe the
lowest cost projects will proceed as selected by consumers. Further, PNG is highlighted as one of the 2 primary
growth projects within Total’s portfolio post 2020. Hence, the combination of one of the lowest cost greenfield
projects, globally, and a motivated partner, should result in execution of IOC/TOT's project. While investors will
likely discount the value of the project, given macro headwinds (up to ~50%), we believe there is currently no
value attributable to this project post Total payment based upon our resource estimate. Current actual and
perceived M&A interested in PNG-related assets corroborate a view that Majors see significant, much higher
than implied in IOC's equity.
Triceratops discovery. Triceratops 3 appraisal well flowed gas at 17.1 mmscf/d (and 200 bbl/d of condensate).
Given the lower porosity (4-6%), these results have positive implications for flow rates of lower porosity zones
such as Elk, and other prospects. The company estimates contingent resource of 1Tcfe, more than double GLJ’s
400Bcfe prior estimate. Triceratops field can potentially be tied-back to an LNG development, adding resource
potential to their core Elk-Antelope field. Next steps for IOC will be to monetize the resource with discussions
currently ongoing with interested parties.
Cash burn. There has been concern around IOC's liquidity given TOT’s cash payment is not expected to be
received until mid-2016 and the sector's focus on balance sheets given the current down cycle. In our view,
however, liquidity risk is minimal as we forecast IOC can fund operations through 2016 independent of the
resource payment. IOC has fulfilled its drilling commitments across its acreage, thus we expect their drilling
activity outside Elk/Antelope to decrease significantly until receipt of the TOT cash payment. For 2016, we expect
capex to be <$200MM and back-end loaded. Additionally, after having handed over operatorship to TOT, we
anticipate G&A to be materially reduced in 2016. All in, we estimate cash use of $200-250MM (capex + G&A).
This is versus current liquidity of $192MM cash at 2Q15 and an undrawn credit facility of $300MM.
Monetizing assets. IOC plans on monetizing its current three discoveries: Triceratops (1Tcfe P50 estimate),
Bobcat (1.5 Tcfe P50 estimate) and Raptor (5.5 Tcfe P50 estimate). Management revealed that discussion with
interested parties (including TOT and XOM) are currently ongoing and expect to close a deal similar to TOT's
Elk/Antelope - with a combination of cash payment and appraisal/development carry. We believe continued
positive exploration and appraisal results could attract a third Major oil company (other than TOT and XOM) to
enter PNG with LNG ambitions. In our view, this would increase price competition and demand for any IOC
discoveries and increase monetization pace and potential.
InterOil Corporation | September 28, 2015
MORGAN STANLEY RESEARCH
AI
