Last week, Pacific Rubiales (PRE) -- the $6 billion Columbian E&P company that owns a 10% working interest in InterOil's (IOC) PPL 237 -- hosted its analyst day. The company's comments confirmed not only that it intends to pursue an unexpectedly aggressive 2013 drilling schedule in PPL 237 but also that the supermajors are jostling against each other to buy a stake in InterOil's assets. PRE's commentary, in conjunction with several confirmatory articles released over the past two weeks, indicates that the interest levels and bidding activity for InterOil's resources and prospective acreage are much greater than the market is contemplating.
PRE is the largest independent oil and gas E&P company in Colombia. The company drilled 202 wells in the past seven years, it operates in five countries, and it is poised to generate $5 billion of revenue and $3 billion of EBITDA at $90 crude in 2013. On April 30, 2012, InterOil signed a binding heads of agreement with PRE whereby PRE could earn a 10.0% net participating interest in PPL 237, and on March 5, 2013, InterOil announced that PRE funded the full US$116 million cash payment due under the farm-in agreement. With a 10% working interest in PPL 237, PRE is more likely to be apprised of the current bidding activity for InterOil's resources and acreage than any other external entity or individual.
At last week's analyst day, PRE's SVP of Exploration Jairo Lugo said, "Then in the case of Papua New Guinea, we have always said that it was opportunistic. We got really a very good discovery and I think that we'll be ready to monetize that. We understand that there is some sort of a beauty contest now between the majors to acquire those positions and we have a tagalong. So we will be able to make a new rapid cash on that property." It took InterOil many years and four wells penetrating the world class Antelope reef to convince the supermajors of Elk/Antelope's reservoir continuity and massive 10 tcfe resource base. PRE's report last week of a "beauty contest between the majors," Upstreamonline's April 11 report of "Anglo-Dutch supermajor Shell (RDS.A) [being] tipped as the likely party" to buy into Elk/Antelope, and InterOil's confirmation on April 15 that "confidential negotiations with more than one bidder are ongoing, and the process is moving forward as planned" confirm that a bidding war for InterOil's assets has in fact transpired.
InterOil's recurring success in discovering reefal structures in its Gulf acreage with the recent Triceratops discovery has confirmed a shallow marine carbonate platform with a well-developed reef complex and invalidated the historical basin models that were developed based on work that was conducted from the 1950s to the 1990s. Such old palaeogeographic models indicated the Gulf acreage comprised a basinal deeper water setting on the margins of a major facies transition from carbonate to siliclastic, but shallow marine carbonate depositional systems identified at Antelope and Triceratops should not exist in this setting.
The discovery of Triceratops, new seismic data, geological field mapping, and new potential field data have resulted in Lugo making this extraordinary statement at last week's analyst day: "In Papua New Guinea, the opportunities that we have interpreted and mapped are very, very, very large. We are talking about in excess of 5 to 10 tcf every single opportunity there." Suddenly, the paradox of how the supermajors could have transitioned from lacking interest in the Eastern Papuan Basin to being embroiled in a "beauty contest" for the resources and acreage has become very clear.
PRE previously guided to a total of two wells being drilled in PPL237 in the fourth quarter of 2013, but in last week's analyst day presentation it bolstered this guidance to a total of three wells, including one in June. This aggressive drilling schedule provides tangible evidence of PRE's optimism regarding not only the prospectivity of Triceratops and the surrounding acreage in PPL 237, but also regarding InterOil's availability of adequate excess capital subsequent to the sell-down of Elk/Antelope that will be required to accelerate its resource aggregation endeavors.
As I argued in my previous article, with exploration costs per flowing boe of less than a quarter of the industry's, an unparalleled pipeline of large reefal prospects, expanded drilling activities with the infusion of capital from an asset sell-down, and an LNG Project that will boast world-leading returns, InterOil is poised to emerge as one of the most coveted energy stocks in the market. I calculate that InterOil will generate free cash flow of approximately $3 billion to $4 billion upon initiating production from the second train of its Gulf Project, or $1.7 billion to $2.3 billion net to the company based on its current share of the project.
Even if the stock were to paradoxically trade at double the integrated oil and gas industry's FCF yield, the Gulf LNG Project is worth in excess of $11 billion today (discounting the future value at a 10% rate), more than $200 per share net to InterOil. The imminent spudding of InterOil's Elk-3 well, in conjunction with PRE's plan to drill its next well in PPL 237 in June, portend an unprecedented opportunity for the addition of significant new resources in 2013, and a corresponding increase in InterOil's multiple to its implied valuation based on the upcoming asset sell-down transaction.